Comparative Assessment Project
Defense AcquisitionResource Management Systems
2010
Countries Included in Subject Report are: Albania, Croatia,
Czech Republic, Germany, Moldova, Poland, Ukraine, and the U.K.
U.S. Naval Postgraduate School
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United States
Naval Postgraduate School
Monterey, California
Center for Civil – Military Relations
International Defense Acquisition
Resource Management (IDARM) Program
Comparative Assessment Project
Defense Acquisition-Resource Management Systems
2010
Dr. Elisabeth Wright, Ph.D., CPCM
Program Manager
International Defense Acquisition and Resource Management Program
U.S. Naval Postgraduate School
Professor Emeritus Trevor Taylor
Cranfield University
United Kingdom
Kenneth J. Allen, J.D.
Adjunct Faculty
U.S. Naval Postgraduate School
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Editor’s Note: At the time of publication, changes to the EC Public Procurement Law as well as
the Czech Public Procurement Law are anticipated and are underway. Those final changes are
not expected for several months; however, the reader should note that some of those changes will
be quite substantive.
Poland and The Czech Republic are formally creating Acquisition Agencies. Those institutions
will serve as centralized agencies responsible for acquisition projects. Anticipated complete
stand up is in calendar year 2011.
A-1
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TABLE OF CONTENTS
PART I
INTRODUCTION
PART II
COUNTRY STUDIES OF DEFENSE ACQUISITION-RESOURCE MANAGEMENT SYSTEMS
Chapter 1 – Albania (NATO)……………………………………………15
Chapter 2 – Croatia (NATO and EU Applicant)……………………….29
Chapter 3 – Czech Republic (EU & NATO)……………………………45
Chapter 4 – Germany (EU & NATO)…………………………………...59
Chapter 5 – Moldova (PfP)………………………………………..……..79
Chapter 6 – Poland (EU & NATO)……………………………………...91
Chapter 7 – Ukraine (PfP)………………………………………..…... 109
Chapter 8 - The United Kingdom (EU & NATO)………………….....119
PART III
APPENDICES A AND B
DEFENCE CONTRACTING IN THE EUROPEAN UNION – THE EUROPEAN UNION’S 2009
DEFENCE DIRECTIVE
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PART I
Introduction
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11
PART I
INTRODUCTION TO THE COMPARATIVE ASSESSMENT OF DEFENSE ACQUISITION
The Comparative Assessment Project. The International Defense Acquisition Resource
Management Program (IDARM), a division of the Naval Postgraduate School’s Center for CivilMilitary Relations, received funding to conduct a comparative assessment of defence acquisition
in a representative sample of European nations. IDARM selected the following countries for the
study:
Albania
Croatia
Czech Republic
Germany
Moldova
Poland
Ukraine
The United Kingdom
Obvious distinctions among these nations are membership in the European Union (UK,
Germany, Poland and Czech Republic – and Croatia’s status as an applicant for EU
membership), NATO membership (UK, Germany, Poland, Czech Republic, Croatia and
Albania), and the former Warsaw Pact or the Soviet Union (Poland, Czech Republic, Albania,
Moldova, and Ukraine).
The diversity among the nations chosen for the Comparative Assessment is deliberate. The UK
and Germany have long histories of democratic governments with a sense of public (including
fiscal) accountability; defence acquisition in competitive and capitalistic marketplaces;
comparatively more resources for defence spending (to include research); and established and
transparent contracting procedures that are subject to judicial review in systems where the rule of
law is firmly established. The former Warsaw Pact nations, Poland and the Czech Republic, are
relatively new to western-style defence acquisition, while other nations, such as Croatia and
Albania, are still emerging from their former regimes. Finally, nations such as Moldova and
Ukraine, which are still influenced by a Soviet-style defence culture, bring strategic and
acquisition perspectives that give the Assessment a broad range of contrast from which to
comment on the various processes and practices of defence acquisition.
“Defence Acquisition.” We are employing the term “defence acquisition” to include a full
range of considerations, processes, and functions in making and effecting decisions related to
defence and national security. Out the outset of defence acquisition, the considerations are
strategic and involve matters of foreign and domestic policy, fiscal and budget considerations,
and decisions at the highest levels of government about priorities, of which defence is just one.
From this comes a determination of requirements, often a joint civilian and military effort, and
12
the process of determining the best solutions to satisfy those requirements with a view to tactical
and force structure considerations, market availability, and affordability (including logistics). In
its final stages defence acquisition becomes the process of procurement, or contracting,
culminating in a contract and beginning the phases of inspection, acceptance, and operations.
The Conduct of the Comparative Assessment. In researching and gathering material for this
Assessment, the Comparative Assessment authors researched and consulted legal and regulatory
authorities, and other material in the public domain (acknowledged where appropriate in our
footnotes). However, and most importantly, the authors conducted on-site visits to the defence
ministries of the studied countries, where they spoke with selected members of their defence
acquisition staffs. We deeply appreciate the time shared with us in those nations, and we are
especially grateful for their candid observations about, and at times patient explanations to us
about, their defence acquisition processes, organizations and significant issues.1 We must also
acknowledge, with comparable gratitude, the U.S. defence liaison personnel in each of these
countries for their coordination and logistical support, as well as their invaluable insights on the
defence acquisition practices of their host nations.
In our discussions with the countries’ defence acquisition staffs, we employed a semi-structured
interview technique. While we approached each country with the same matrix of issues and
questions, we quickly learned that the information and level of detail we received varied
according to the responsibilities, skills and interests of the staffs that the country made available
to us, as well as the nation’s strategic and fiscal posture, and its historical and cultural
background.2 No matter how much more time we could have spent in each nation, we believe it
would be impossible to construct parallel information sets for each country. Therefore, we are
writing from a mixture of relatively hard data along with others’ opinions, and our impressions,
and while owe the merits of our work much to others, any defects or inaccuracies are our
responsibility.
In composing the individual country reports (Part I), we highlighted noteworthy features of each
nation’s defence acquisition system, not only because of its significance to that nation, but also
to lay the framework for comparisons in the broad areas of activity that constitute the domain of
acquisition. In that regard, our study was conducted from early to mid 2010, and it is important
to remember that change in defence acquisition is constant.3
Organization of the Comparative Assessment Report. This Report is organized into this
Introduction, which gives background about the Comparative Assessment as well as comments
about defence acquisition; Part I, the country studies of the nations considered by the
1
Our interviews were conducted on a non-attribution basis.
2
For example, in Germany we were provided with considerable information on the organization for defence
acquisition and the pricing of contracts, while in Moldova we received a very informative briefing on how its
Ministry of Defence purchases commercial items through a commodity exchange.
3
In this regard, the contracting rules in the nations of the European Union are literally in the process of change as to
defense contracting, as might be the previous practice of exempting defense procurement from the public
contracting procedures. See Part III.
13
Comparative Assessment,: Part II, which contains our comments and observations; and Part III,
which summarizes key features of the 2009 European Union’s Defence Directive, which will
directly affect at least half the nations studied and indirectly effect the others.
We hope our readers will appreciate not only similar features in defence acquisition in the eight
countries we studied, but also the variety of perspectives and techniques that these nations
present. One constant we found was a common dedication and professionalism among the
defence acquisition staffs, and their intense desire and efforts to provide the right, high-quality,
and cost-effective solutions to their nation’s defence requirements.
Trevor Taylor
Shrivenham, United Kingdom
September 2010
Kenneth J. Allen
Catoctin Mountain, Maryland
September 2010
14
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15
PART II
COUNTRY REPORTS OF DEFENCE
ACQUISITION-RESOURCE
MANAGEMENT SYSTEMS
16
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17
Chapter 1
The Republic of Albania
Introduction
Significant Features of Albanian Defence Acquisition
● Legislative involvement in defence acquisition, primarily by providing budget authority,
and significant ministerial control through the approval of budget requests, oversight of defence
expenditures, and the approval of contracts “impacting on national security.”
● Requirements generation system and processes are segregated by function and unit and
could be improved by integration.
● A structured planning, programming, and budget process for devising, approving, and
executing major defence acquisition efforts.
● Procurement processes resemble the European Union,1 with major defence procurement
conducted centrally, with duties dispersed to avoid conflicts of interest and strike a balance
among the stakeholders’ influence.
Albania’s Strategic Defence Environment
The National Situation. Albania, like Poland, transitioned from its Communist era with its
sovereignty and territorial integrity intact. This meant that the structures and staffing of its
military (which is small by western standards), and its civil service (which is large in proportion
to government employment in western nations) remained in place. What has changed is
Albania’s basic strategic defence posture; it is now “becoming west,” and no longer defending
against the west.
Albania’s National Security Posture. Albania’s notes that its national security concern, which
was never from external threats during its Communist era, is the possibility of entanglement in a
Balkan dispute, especially in regards to Kosovo, with which it maintains close political, ethnic,
and cultural ties.2 Albania views its defence needs as a capable conventional ground force with
adequate air (helicopter) support and a naval (coast guard) capacity.3 Albania’s accession into
1
See our discussion of the European Union defense procurement rules, Directive 2009/81/EC, 13 July 2009, at
Appendix 2 of this Comparative Assessment.
2
It was observed, even before Kosovo’s declaration of independence, that Albania’s connection to Kosovo is such
that its “future economic prosperity is linked to finding a solution to the Kosovo problem.” Miranda Vickers, The
Albanians, I.B. Tauris (London) 1999, p. 254. After Kosovo’s declaration of independence, Albania remains
attached to Kosovo’s’ situation by virtue of the many ethnic Albanians residing in Kosovo where tension remains
high with Serbian Kosovars (See “Kosovo Demonstrations,” International Herald Tribune, May 31, 2010, p.3
[reporting on Albanian Kosovars protesting Serbian influence in Kosovo’s elections]). The concept of a “greater
Albania,” i.e., Albania absorbing Kosovo, has not been abandoned and is a potential source of conflict.
3
Albania’s major defense acquisitions are essentially conventional, and modernizing using available technologies.
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NATO in April 2009 requires, de jure, that it adapt its defence establishment accordingly (e.g.,
making purchases of equipment that comply with NATO standards, i.e., NATO Standardization
Agreements, or STANAGs, and being able to satisfy its obligation for 8%-10% ground combat
force deployment with 50% residual force readiness4), and its desire for accession into the
European Union requires, de facto, that it adopt defence acquisition practices that are consonant
with those of the EU. It is doing this, and has implemented an acquisition planning process that
is structured for a transparent and competitive environment.
Albanian Defence Acquisition Planning
The Background of Albanian Public Acquisition. Albania is profiting from the commerciallycentric acquisition experiences of western governments and defence institutions. In this regard,
the advice it received on public procurement, at least at the outset of its non-communist era, was
based on the recommendations of western governments and international organizations, to
include financial institutions. Those sources were interested in helping Albania effect a level of
transparency and efficiency for its day-to-day public procurement and budgeting requirements in
a manner that would give some level of confidence to international investors.5 However, those
processes and methods appear in many ways inadequate for the long-term, multi-year efforts and
authorities that are needed for the conduct and management of major defence acquisition. Also,
and like many of former Communist nations, its government is organized in pyramidal (i.e.,
hierarchical) models that tend to sacrifice authority and flexibility, even at senior defence levels,
in favor of control at the ministerial level. Its laws are typically proscriptive and have little
structure for accommodating delegations of responsibility and authority to lower levels for
initiative, flexibility, and discretion. Albania is now receiving defence acquisition advice from
NATO allies, in particular the U.S. Department of Defense, and we found the Albanian defence
resource and acquisition officials we interviewed, both program and procurement personnel, to
Army. Armored wheeled vehicles, mobile command and tactical communication equipment, combat service
support, and individual soldier equipment.
Air Force. Five AS 535 AL (Eurocopter) helicopters over a four year period. The MOD is planning for the
major acquisition of a NATO-compliant air surveillance system that provides air control, navigation and
communication, and information sharing capabilities.
Naval. A coastal surveillance system, consisting of a radar subsystem with an automated identification system;
an integrated communications subsystem, workstations, and integrated vessel database; and an integrated system
with record/replay function. Also, three patrol ships, and supporting yard facilities, over a three-year contract
period.
4
It appears that Albania is near the 8-10% deployment criteria, but far from meeting the 50% of force readiness to
NATO standards.
5
Albania is still in transition. After the end of the Soviet Union it retreated into a form of isolation and has
changed much slower than other former Communist nations. Vickers, Id at 254. Even today, Vickers’ observation
in 1999 remains accurate, that Albania has a level of political tension, especially between democrats and socialists
(who, even while we were in Tirana in May 2010, led a large protest against the government amidst calls for its
resignation), and is still “evolving into a society where tolerance and understanding co-exist with public trust in
institutions of law and justice.” See Vickers. Id. At 255.
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be knowledgeable of their pertinent laws and regulations; open to change and improvement; 6 and
realistic and candid about their organizational strengths and limitations.7
Albanian Defence Programming. Albania has an established process for programming,
planning, and budgeting (“PPBS”) to support its defence acquisition.8 Planning begins with a
National Security Strategy from which emerges a Military Strategy. Defence planning is
conducted within the framework of a 5-year forecast of requirements that is the basis for
programming and budgeting. However, planning and programming integration is not always
reflected in budgeting and execution. Of note, the Albanian defence procurement regulation,
Decision 1403 (“Dec. 1403,” discussed in detail below), ties the planning process to
procurement, which begins with defining requirements, which is done at the service level. 9 No
formal requirements generation system has been effected for armed forces’ integration. The
services’ operational requirements are then submitted to the General Staff, which submits them
to a Modernization Board (MB).10 The MB’s function is governed by the Council of Ministers,
and its members are appointed by the Minister of Defence.11 The MB serves two important
functions: it approves the operational requirements, and if approved, classifies a project as
defence or non-defence, which classification has budget and procurement implications. The
MB’s findings are then submitted to the Chief of Defence, who submits them to the Minister of
Defence for approval, who then requires the Modernization Project Management Directory
6
When we asked a senior official about what he would like if he could change the system, he immediately sketched
out a diagram and explained the points at which he desired more flexibility and delegation of authority. His vision
reminded us of the situation we perceived in Germany’s BWB, See Germany Comparative Assessment.
7
In its briefings and meetings with the Assessment team, the Ministry of Defense candidly and professionally
presented “lessons learned,” which included the importance of, and/or the need to improve on, establishing priorities
and balancing operational requirements with budget formulations, improving project design, consolidating defense
acquisition (which it appears to have done to some extent), and effecting coordination with NATO (MOD Briefing
“Defense Acquisition in Albanian Armed Forces,” slide 27).
8
A PPBS is not unique to the United States in particular or to military organizations in general. It is a planningoriented approach to developing a program budget. A program budget is one in which expenditures are based
primarily on programs of work and secondarily on character and object. It is a transitional form of budget - between
a traditional character and object budget on the one hand, and a performance budget on the other. The major
contribution of a PPBS lies in the planning process, i.e., making program and policy decisions that lead to a specific
budgets and plans, including multi-year plans. The Albanian process is based on the U.S. Department of Defense’s
PPBES model [“E” standing for Execution]. See a brief discussion of the U.S. PPBES in Chapter # of this
Comparative Assessment.
9
The governing defense procurement regulation, Decision 1403, defines “structures that generate operational
requirements,” as permanent or temporary structures, specially established, which compile the operational
requirement for goods or services, by supporting the accomplishment of the main task and mission,” and specifies
that where different structures have similar requirements, that the operational requirements are to be integrated into a
joint program. Dec. 1403, Ch. II, 1.2.
10
Decision 1403 defines the Modernization Board as a structure established near the General Staff of the Armed
Forces, which functions in accordance with the applicable ministerial decisions. It analyzes the operational
requirements submitted by those who compile them in terms of operational, functional, and technical aspects, and
classifies them as to whether they should be treated as a defense procurement (i.e., the application of the Public
Procurement Law might cause harm to the interests of national security). Dec. 1403, Ch. II, 1.3
11
The Modernization Board’s membership typically consists of the Deputy Chief of Defense, Land Force
Commander, Navy Force Commander, Air Force Commander, Training and Doctrine Commander, Logistical
Support Commander, Staff Director (Chief of Staff), and the Directors of the J2, J3, J4, J5, J6, and J8.
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(MPMD) to develop Project Plan(s) for execution.12 The MPMD will also, if needed, effect
project design either internally or by contract for consultancy services or project design.13 Once
a project is ready to the satisfaction of the MPMD, it is submitted back to the MB, which places
it into procurement channels. The MPMD’s involvement in Albanian defence acquisition, from
the operational request to contract execution, is pervasive and deliberate, and is intended, inter
alia, to balance the stakeholders’ influence in a major defence acquisition.14
Albanian Budgeting and Resource Management. Albania faces the same challenges as every
other nation in managing its fiscal resources. Its defence spending represents less than 2% of the
Government’s budget, of which 40% is for personnel, 31% is for operation and maintenance, and
29% is for equipment (capital investment).15 One of the resource management practices that the
Assessment noted is that upon incurring a binding contractual liability, even a long-term, multiyear obligation which has been approved in its budget process, the actual funding is provided
annually, and then through ministerial channels, in which it is subject to discretionary reallocation. This is truly what the Americans would call “incremental funding.” However, this
practice can (and apparently has), result in Albania becoming delinquent in some of its payment
obligations in its contract for helicopters and it has compounded problems with its ship
procurements, thereby subjecting it to contractual penalties and program delays. Our observation
is that a nation’s financial resource management of defence acquisition is extremely unique and
therefore difficult to compare on a country-by-country basis.16 However, to be sure, Albania’s
“incremental funding” has a negative effect on its procurement.
Albanian Defence Procurement (Contracting)17
12
Dec. 1403 defines the MPMD as the “structure that is responsible for conducting and administrating the
[defense] procurement process for goods and services.” Dec. 1403, Ch. II, 1.4. The MPMD is, in effect, the staff
that links planning and procurement.
13
Decision 1403 devotes a great deal of attention and regulation to the procurement of consultancy and design
services, Dec. 1403, Ch. VI. Our Study will not address these procedures, but we note they contain several
procedures and cautions to ensure competition and quality, while guarding against conflicts of interests.
14
While the MPMD’s roles are all encompassing, it has been noted that there is the potential for conflicts of
interest as their requirements development can influence the solicitation development, hence evaluation
transparency.
15
While the percent of Albanian defense spending for capital equipment might appear larger than expected, we are
reminded that Albania is emerging from an era during which it was supplied with equipment from the Warsaw Pact,
much of which is now obsolete or nonsupportable for logistical and political reasons (e.g., Albania’s membership in
NATO).
16
For example and by comparison, in the U.S., defense acquisitions of the type that Albania is making (see fn 4
supra) would typically be funded, in their entirety and at the outset, by an appropriation designated for those
purchases which could not be diverted from that purpose without great effort. Furthermore, those funds, once
awarded against a contract, are treated as “obligated” and available for payment (“disbursement”) even beyond the
fiscal year for which they were appropriated. In contrast, governments that apply generally-accepted accounting
practices to long-term projects can be handicapped in marking and funding their contractual commitments.
17
The governing defense procurement regulation, Decision 1403, defines “military procurement process” as the
process that “includes the operational requirement generation, the technical proposal preparation or designing task,
the procurement procedure conduction, contract implementation, operation of goods or system and their
management during the entire life cycle of the goods, until the disposal of from the armed forces.” Dec. 1403, Ch.
1, 29). In this regard, the English word “procurement” is used by Albania to refer to the entire process, while the
Study is using it to refer to the contracting effort of the larger “acquisition” process.
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Albanian Public Procurement in General
Although Albania is not a member of the European Union, the legal framework in
the area of [its] public procurement is based on a model that complies with the
“acquis communautaire” and international standards. To this end, the legal
framework aims to consolidate the position of state authorities in public
procurement procedures and harmonize the applicable legislation with European
Union Directives.18
Procurement Responsibilities. If the MOD’s procurement requirement is classified as a
commercial effort (e.g., a procurement for defence real estate management, COTS equipment, or
support services), it is effected by the MOD’s Commercial Procurement Section. If it is
classified as a military effort, the Defence Procurement Unit (DPMD) conducts the procurement.
In either case, procurement is done by a specialized, centralized staff in the Ministry of Defence.
Authorities for Albanian Defence Procurement. Albanian defence procurement is governed
by a combination of authorities consisting of laws and defence regulations. This combination of
a detailed public procurement law, which exempts certain defence procurement from the basic
public procurement law, and places it under a defence regulation, is typical of the nations we
studied.
● Public Procurement Law, No. 9643 (20 November 2006) (“PPL”). This law governs all
public procurement unless otherwise exempted.19 In this regard, the PPL applies to defence
procurement.20 However there are defence exemptions in Article 5 of the PPL, and those
encompass most defence procurement, since it exempts procurements related to matters of
national security,21 the purchase of “arms, munitions and war material, or related services,”
(which exception does not apply “regarding products not specifically intended for military
purposes”),22 or procurements under emergency circumstances, armed conflicts, training, and
operations outside Albania.23 Also the PPL provides that if its procedures and requirements
conflict with Albania’s obligations under an international agreement, that the requirements of the
international agreement take precedence.24
18
Sabina Lalaj and Besa Tauzi, of Boga and Associates, Tirana, writing on Albania in Public Procurement, Global
Competition Review, London 2009, ¶2, p. 8. Elsewhere, Lalaj and Tauzi comment that the Albanian system is
remarkably similar to EU Directive 2004/18/EC, which is the basic EU procurement directive, id at ¶21, p.10.
19
PPL, Art. 4
20
PPL, Art. 5.1 which requires, per PPL, Art. 2, non-discrimination and equality in the treatment of tenderers,
transparency in the procurement process, and “proportionality of requirements and obligations imposed to actual and
potential tenderers.”
21
PPL, Art. 5. 2(a).
22
PPL, Art. 5.2(b). Therefore, for example, procurement of an information system, for use by the military, would
be subject to the PPL unless it was determined to be for a “matter related to national security” under Art. 5.2(a).
However, we were advised that purchases for the military that are of operational significance, even if not “arms,
munitions and war material” are treated as “related to matters of national security.”
23
PPL, Art. 5.2(c). We note that the Art. 5 exclusions cited in 5.2(a),(b) and (c) are not defined in the PPL or in the
governing defense procurement regulation, Decision 1403.
24
PPL, Art. 8. The PPL also does not apply to classified contracts (Art. 6), certain subject matters (Art. 7, e.g.,
public utilities, Art. 7(d)), and contracts based on a legally exclusive right (Art. 9). It remains to be seen how the
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● Council of Ministers Decision No. 1403, 27 October 2008 (“Dec. 1403”). This
regulation governs the defence procurement that is exempt from the PPL under Art. 5.25 The
Decision posits that its purpose is to effect procurements of the type which, if conducted
according to the PPL, could “harm the essential interests of the defence and the national
security.”26 In essence, Decision1403, which is discussed below in ¶7:10, is an abbreviated
version of Albania’s public procurement rules, except that it does not include an open procedure,
but it does include government-to-government military procurements.
Albanian Defence Procurement Under Decision 1403 - Regulation on the Procedures Used
by the Ministry of Defence to Procure Some Goods and Services Excluded from the
General Rules of Public Procurement
Key Concepts. The Decision commences with definitions. Of note is the encompassing concept
of a “military procurement process.”27
In its discussion of procurement roles and
responsibilities, the Decision defines the Contracting Authority as the focal point for contract
award and for reporting on defence acquisition activities to the Council of Ministers.28 The
Decision specifies that the “Contracting Authority” has the authority to effect, and responsibility
for the conduct and administration of, a procurement. In practice, this is the Minister of Defence,
with a subordinate official, more accurately described as a “Contract Administrator” who
executes the day-to-day details of the tendering, contract award, and contract administration
processes. The Administrator is supported by assistants. The Decision also talks of the “Head of
the Contracting Authority,” who by law is the Minister. This official makes, inter alia, decisions
regarding complaints (protests). The Decision also defines the key components of the process,
from planning components to the procurement/contracting functions.29
Procurement and Budgeting. The Decision links procurement to resource management and
budgeting by drawing an early distinction between multiyear and annual contracts, and
specifying that multiyear contracts affecting national security, as so classified by the MB, fall
under the responsibility of the Council of Ministers.30 The Decision provides guidance on the
cost estimating of procurements for purposes of planning, budget formulation, and coordinating
with NATO, and it recommends pricing techniques and advises planners to consider the cost
effectiveness of the entire system.31 In practice, however, there is not yet an established system
to effect these ambitious goals.
2009 European Defence Directive, which is intended to reduce the exemption of defense procurement from public
channels, will influence Albanian defense procurement.
25
Decision 1403 significantly amends Council of Ministers Decision No. 521, 8 August 2007
26
Dec. 1403, Ch. II, 1
27
Dec. 1403, Ch. 1, 29). See fn 17, supra.
28
Dec. 1403, Ch. I, 10) and Ch. II, 1.1
29
Dec. 1403, Ch. II
30
Dec. 1403, Ch. III, 1.a) and 1.b). The actual award of such a contract requires, i.e., after a contractor has been
selected, requires the Council’s approval. Dec. 1403, Ch. V, 4.f,i)
31
Dec. 1403, Ch. III, 2.
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Procurement Roles and Functions. The key roles in the procurement process are those of the
Contracting Authority and the Procurement Unit, Tender Evaluating Group, Contract
Negotiating Group, and Contract Management Sectors.
The Contracting Authority (i.e., Administrator) has first line responsibility for the conduct of the
procurement.32 This includes initiating the procurement action; citing the funding and selecting
the procurement procedure, to include the rationale for its selection;33 selecting the participants
for consideration and in selecting the contractor for award.34 The Contracting Authority is also
responsible for ensuring that those who participate on behalf of the Government are qualified,
submit the proper certifications, and are free of conflicts of interest,35 and also that there is an
appropriate segregation of duties and roles among those involved across the entire procurement
project (e.g., defining requirements, drafting specifications, contract award and contract
administration).36
The Procurement Unit has the day-to-day responsibility for the tendering and contract award
process. It is comprised of MOD staff that specialize in procurement. The Unit assigned to a
major defence acquisition consists of at least three persons, one of which is a lawyer, and they
are required to have annual training in government and military procurement.37 The
Procurement Unit prepares the required documents, which consist of standard and special (i.e.,
tailored to the individual procurement) documents, which are addressed in detail in the
Decision,38 and which are to be provided equally to all participants.39 The Procurement Unit
may be assisted as needed by technical specialists, to include, if needed, contracted experts.40
Commencement of Tendering. As with other European systems, the procurement (other than a
sole source procurement) begins with soliciting requests to tender from the vendor community
from which “finalists” are invited to submit a tender. The Decision specifies the process and
content of notices of contracting opportunities. It requires that notice documents contain
sufficient information to allow vendors to make an informed decision as to whether they will
participate.41 In more specific terms, the Decision addresses the tender content and submission
schedule, government points of contact for the specific contracting process, the award criteria,42
32
Dec. 1403, Ch. V, 1.a)
Dec. 1403, Ch. V, 1.c,c) [sic]
34
Dec. 1403, Ch. V, 4.e
35
Dec. 1403, Ch, V, 1.a)
36
Dec. 1403, Ch. V, 1.b). This responsibility is also shared by the “Head of Contracting Authority,” Id.
33
37
Dec. 1403, Ch. V, 1.b). The Assessment is advised that a formal training syllabus is being devised.
Dec. 1403, Ch. III, 3
39
Dec. 1403, Ch. III, 3
40
Dec. 1403, Ch. V, 2.a). We were advised that there is sometimes a shortfall in technical support in both the
preparation of tendering documents and evaluation of tenders – a problem common to all nations.
41
Dec. 1403, Ch. III, 4a)
42
Dec. 1403, Ch. III, 4b)
38
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and instructions for candidates/offerors.43 The Decision contemplates that parties might be
afforded equal participation in pre-submission site visits, and opportunities to ask questions of
the Contracting Authority. Such questions, and the Contracting Authority’s responses (which are
transmitted by the Procuring Unit), are to be provided to all participants, as well as any
modifications to the tendering documents and rules. The contents of the tender form are
specified and include representations that the offeror accepts the tender’s terms without
exception; represents that the tender is in compliance with the technical specifications; and at the
stated price which it warrants for a minimum of 150 days, the purpose of which the Decision
explains is, inter alia, to protect the Contracting Authority against “irresponsible offers” or a
“biased method after their openings,” or a refusal of contract subscription.44 A bond or security
is required at 2% of the amount specified in the tender documents. The duration and terms of the
security and the manner of payment, or the Contracting Authority’s release of the security, are
also specified in the Decision.45
Specifications. Specifications are a part of the “specific information” in the tendering notice,
and are addressed in the Decision in detail for both supplies and services. 46 Specifications are to
avoid unduly restrictive or anti-competitive features; are expected to affect all sources equally;47
are to solicit minimum requirements; are to be written in terms of performance where possible;48
and are to refer to NATO or other applicable standards.49 As to supplies, the specifications are to
contain quantities and delivery schedules, and may specify methods or standards of inspection
and testing, and the submission of samples, with provisions for confidential treatment.50 Service
contracts require comparable terms of reference, and tenders for their award may require
participants to provide evidence of previous work.51
Tender Evaluation and Contractor Selection Criterion.52 Contracts subject to the Decision
are made on the basis of a combination of technical quality and price. This is referred to as the
“greater economic priority.” The evaluation is to take into account the cost of life cycle support
and accompanying equipment, which is to be evaluated in concert with and in regard to the
“maximal efficiency” of the technical aspects of the proposal. The Decision does not address
43
Dec. 1403, Ch. III, 4c). Remember that in this system, procurements can be conducted in two steps, when an
economic operator requests to participate (a “candidate”) and when it is actually negotiating for a contract (a
“tenderer” or an “offeror”).
44
Dec. 1403, Ch. III, 4f). This is comparable to the U.S. practice of a “firm bid,” which is only applicable in U.S.
contracting to the sealed bidding of FAR`Part 14 – a process not typically employed for defense contracting. Our
discussion of the intent behind the Albanian firm bid provision revealed that the practice of a lower-priced offeror
withdrawing in favor of a higher-priced vendor (who then makes a generous subcontract to the withdrawing party) is
not restricted to the more established public procurement systems of other nations.
45
Dec. 1403, Ch. III, 4.f)
46
Dec. 1403, Ch. III, 5
47
Dec. 1403, Ch. III, 5.a)v.
48
Dec, 1403, Ch. III, 5a)iv. “…the characteristics of goods, works and services to be procured,” and are to
describe the “procurement object.”
49
Dec. 1403, Ch. III, 5.a)vi
50
Dec. 1403, Ch. III, 5.a)vii
51
Dec. 1403, Ch. III, 5b). This provision is comparable to the US requirement for information on “past
performance.” U.S. Federal Acquisition Regulation at FAR Subpart 15:6
52
Dec. 1403, Ch. III, 5c)
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evaluation methodology, nor does it discuss methods of assessing “past performance,” or of
establishing quantitatively or qualitatively assigned values (i.e., weighting).
Procurement Methods. Like other nations that have a defence procurement regulation,
Albanian defence procurement does not employ the default “open procedure” of the Public
Procurement Law,53 but rather is limited to the “restricted,” “negotiated,” and “country-tocountry” procedures described below.
● Restricted Procedures.54 The Restricted Procedure is conducted by sending economic
operators who are selected by the Contracting Authority, in consultation with the MB and
MPMD, an invitation to participate. Selected candidates are sent the full notice, and other
documents prescribed in the Decision. The Contracting Authority selects the best tender of those
responding on the basis of the stated award criteria, e.g., price, operational, and technical factors.
At this point, an “award notice”55 is sent, and the negotiations proceed to the next stage. In other
words, serious negotiating is conducted with the one source selected.
● Direct Negotiated Procedures.56 This is the Albanian version of sole source procurement
(i.e., with one offeror), with the Contracting Authority having the authority to employ this
procedure under seven circumstances set forth in the Decision. These circumstances are as
follow:57
The limiting effects of proprietary rights that necessarily restrict the purchase to one
source;
After the conduct of a restricted procedure, it is determined that only one competitor is
capable or qualified;
There are urgent circumstances that warrant the procedure, in which case the resultant
contract cannot be for a period in excess of the current budgetary period;
The procurement is a follow-on to a previous purchase. In this case, the system must have
at least 50% of its anticipated usage remaining, and the Modernization Board plays a role in this
determination;
The purchases are warranted from a particular source in order to ensure the continued
capability of, or interoperability with, existing systems and equipment;
53
PPL, Art. 30. This procedure is similar to [ref to EU process and FAR]
Dec. 1403, Ch. I, 12 and Ch. IV,1
55
U.S. readers should be mindful that the English term “award notice,” when used in European-type public
procurement, does not mean, as it would in the U.S., that a contract has actually come into effect. It means, in
effect, that the recipient is now in a “competitive range” of one.
56
Dec. 1403, Ch. I,13 and Ch. IV, 2
57
Dec. 1403, Ch. IV, 2a) through 2g)
54
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The purchase represents, in effect, a necessary modification to an existing contract for
reasons not anticipated at the outset, and which warrant the modification in order to achieve and
maintain the purpose and effect of the initial contract.
In cases where a more public procurement process could pose security concerns.
● Government to Government Procurement.58 The Decision’s treatment of this procedure
tracks a description of the buyer’s process in effecting a U.S. Foreign Military Sale in which the
selling government either sells the buyer a supply from its stock, 59 or places a contract order for
the benefit of the buyer.60 The Decision specifies four conditions for the use of this procedure:61
That the Albanian government does not have the technical capability needed to support the
entire procurement;
Other procurement avenues do not afford adequate resources;
The procurement is a follow-on to an existing relationship which economy counsels to
continue; or
Urgency.
Tender Receipt, Evaluation, and Contract Award. The evaluation of tenders and the
negotiation of terms are done by a Tendering Evaluation Commission and a Contract Negotiation
Commission (also referred to as “Groups”).62 These Commissions are appointed as needed for
each procurement by the Minister of Defence.63 The Commissions can operate jointly, except in
the restricted procedures, in which case they will consist of different members.64 The Tendering
Evaluation Commission consists of an odd number of no less than three persons, none of whom
prepared the tendering documents.65
The manner and timing of tenders is specified in great detail in the Decision, and late
submissions are returned unopened.66 The Decision provides that different elements of the
tender (e.g., qualification certifications, technical offers, and price) can be required to be
submitted in separate sealed envelopes.67 When tenders are evaluated, the Procurement Unit acts
in a supporting, ministerial, and advisory role, but it does not evaluate tenders. 68 Where the
58
59
60
61
62
63
64
65
66
67
68
Dec. 1403, Ch. I, 14 and Ch. IV, 3
Dec. 1403, Ch. IV, 3.a)
Dec. 1403, Ch. IV, 3.b)
Dec. 1403, Ch. IV, 3.b) i through iv
Dec. 1403, Ch. V.
Dec. 1403, Ch. I, .1.5) and 1.6) respectively.
Id.
Dec. 1403, Ch. V, 2.c)c) [sic]
Dec. 1403, Ch. V, 3.a)
Dec. 1403, Ch. V, 3.a)
Dec. 1403, Ch. V, 4.a)
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Restricted Procedure is used, the Decision even specifies the order in which components of the
tender are evaluated, which are qualifying and legal documentation, followed by technical, and
then price.69 Technical evaluations can include product testing that is preceded by notice of this
requirement and an agreed process with the offeror.70 The evaluation may reveal the need to
engage in “clarifications” with offerors, which are prepared by the Evaluation Commission and
are to be exchanged in writing with offerors and made a matter of the procurement record. 71 The
Evaluation Commission is to complete its work within 30 days,72 and it classifies, or ranks,
offerors (i.e., in the Restricted Procedure), and a record is maintained of any voting or minority
opinion.73 The Chairman of the Evaluation Commission prepares a summary report for the
Contracting Authority, which includes a recommendation for the selection of a contractor. After
the resolution of any complaints, the Contracting Authority makes a selection and issues the
award notice.74
Final Contract Negotiation. An offeror that is selected at this stage of the process will be the
recipient of what is called in the English translation of the Decision the “award notice.”75
However, while this is most certainly good news for the offeror, this is not yet a binding contract.
While the award notice indicates the Albanian government’s desire to contract, it opens a final
stage of contract negotiation, mostly on non-price matters. This is done, on the part of the
government, by the Negotiating Commission, which is to include “jurists, economists, and
specialists of the domain from the MPMD,” and a representative of the military unit for which
the contract is being awarded.76
Various Contract Terms and Conditions
● Performance Security and Penalties. Contract security is assured by a guarantee of 10%
of the contract price which serves as a form of liquidated damage in cases of default. The forms
of acceptable security are specified in the Decision, and there are provisions to reduce the
security arrangements in cases where there are progress payments.77
● Offsets.78 Albania has no offset practice.
● Changes. Albanian contracts do not contain standard terms and conditions that give the
Government the unilateral right to amend the specifications.79 Such changes, which Albania
69
Dec. 1403, Ch. V, 4.b). Unlike the de facto practice the U.S., the Albanian technical evaluators also consider the
offeror’s price.
70
Dec. 1403, Ch. V, 4.b)
71
Dec. 1403, Ch. V, 4.b). It appears that the actual clarification correspondence is handled by the Procurement
Unit, Dec. 1403, Ch. V, 2.c)c) [sic]
72
Dec. 1403, Ch. V, 4.b). This period can be extended by the Contracting Authority.
73
Dec. 1403, Ch. V, 4.c) and 4.g)
74
Dec. 1403, Ch. V, 4.e)
75
Dec. 1403, Ch. III, 4g)
76
Dec. 1403, Ch. III, 5. Again, we note a specificity in the Albanian procurement staffing and process that is not
reflected in other countries’ regulations, to include the United States.’
77
Dec. 1403, Ch. III, 4i)
78
See a discussion of offsets in Appendix 2.III to this Comparative Assessment.
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recognizes are often necessary, and are effected by negotiation and do not appear to have posed
many problems.
● Terminations for the Convenience of the Government. Albanian contracts do not have
terms that give the Government the unilateral right to end a contract before its conclusion.80
● Competitive Dialogue. Albania does not use the competitive dialogue.81
Protest Procedures. The defence complaint process provides a complaint form and instructions
in the tendering documents.82 The Decision gives the right of complaint to any person whose
present or past “interest in a procurement” is “damaged or risks to be damaged,” by a decision of
a Contracting Authority.83 The complaint is to be filed with the Contracting Authority within
five days of when the protestor recognizes, or “should have” recognized the infringement,84 and
it must set out the factual and legal basis of the complaint.85 Upon the filing of a complaint, the
“Head of the Contracting Authority,” – meaning an official above the Contracting Authority, and
perhaps at a ministerial level – will direct that the procurement be suspended until the complaint
is resolved. The Head of the Contracting Authority will assign a member of the Contracting
Authority (Procurement Directorate Group), other than those conducting the protested
procurement, to investigate the complaint with the administrative support of the Procurement
Unit.86 Depending on the nature of the complaint and stage of procurement, the Head of the
Contracting Authority may assign the tendering commission a role in the evaluation and
recommendation process.87 The decision of the Head of the Contracting Activity is to be made
within 10 days of the complaint, but this period can be extended for reasons such as waiting for
the receipt of the documents needed to make the examination.88 If the complaint requires a delay
in the process that affects other things, such as the date for the receipt of tenders, all parties are
notified of the revised schedule and the reasons therefore.89 The senior lawyer within MOD
advised the Assessment team that his staff assists the complaint examining official, and renders
an opinion on the merits of the complaint together with its recommendation, and that the
deciding official typically acts in accordance with the legal staff’s advice.90 The Decision, unlike
79
By comparison, the U.S. has such provisions. See Appendix A to this Comparative Assessment
By comparison, the U.S. has such provisions. See Appendix A to this Comparative Assessment
81
The competitive dialogue is discussed in some detail in Appendix B to this Assessment, on the 2009 European
Defence Directive.
82
Dec. 1403, Ch. III, 4.j)
83
Dec. 1403, Ch. VIII, a)
84
Dec. 1403, Ch. VIII, b). The “should have” standard is typical of protest procedures, which typically view the
vendor as having an obligation to be diligent regarding its interests and treatment.
85
Dec. 1403, Ch. VIII, c)
86
Dec. 1403, Ch. VIII, c). This insures that the examining official will have access to the entire record as well as
the views of the procuring unit. We were advised that any legal staff in support of the procuring unit may act as an
advocate for the procuring unit whose work is the subject of the complaint.
87
Dec. 1403, Ch. VIII, c)
88
Dec. 1403, Ch. VIII, d)
89
Dec. 1403, Ch. VIII, dh) [sic]
90
The MOD legal staff is organized into responsibilities for international law, litigation, and basic legal support,
such as the drafting and review of documents.
80
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the Public Procurement Law, makes no mention of complaints to the courts91 or the possibility of
relief from the Public Procurement Advocate.92 However, the researchers were advised that
recourse to the courts in the matter of defence procurement is available but is seldom pursued.
91
92
PPL, Ch. VIII, Art. 68
PPL, Ch. IX, Arts. 69-74
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Chapter 2
The Republic of Croatia
Introduction
At the conclusion of the war that brought independence in 1995, Croatia had armed forces
numbering some 250,000 equipped with a wide range of items that had been either bought
privately by individual soldiers, or captured from the depots of the former Yugoslav Army, or
obtained on a black market established in the face of an international arms embargo. Croatia
thus needed to rationalise and standardise its inventory as well as to down-size drastically the
size of its forces. Although the Yugoslav wars with Croatian involvement ended in 1995, serious
defence reform began only after the fall of the Tudjman regime in 2000, when the new Croat
Government decided to pursue NATO and EU membership. Croatia thus has a multidimensional and long-established change programme which is still underway.
Croatia has a legacy of aged equipment from the USSR and communist world. Disposal, not
least of munitions that that have exceeded their usable life, is a significant issue. It has several
hundred thousand tons of out-of-life munitions to deal with, which cost money to store safely
and will cost money to dispose of. To date, Croatia has not experienced a major accident
involving stored munitions (unlike Serbia and Albania we were told) but we lacked the means to
verify the risk involved in storage. Croatia has firsthand experience and therefore awareness of
the challenges that can arise with the disposal phase of acquisition.
It is a small state of only around five million people. By North American and European
standards it is not a rich country, with a per capita GDP of $15,000. These considerations push
Croatia towards reliance on international structures, since self sufficiency in most areas is not
feasible. Its conception of its military needs is determined significantly by the cooperation and
contributions it expects from allies and partners and by the contributions to international security
that it aspires to make.
Croatia is working actively to introduce Western standards and practices regarding defence
governance (addressing governance, accountability, transparency, the minimising of corrupt
practices and so on) and management (involving effective the direction, planning, coordination,
organisation, and monitoring of the use of resources for defence). While much progress has been
made, facilitating Croatia’s entry into NATO, there remains a shortage of, for instance, the
civilian experts in defence and security who make possible the effective legislative and media
oversight of defence acquisition. There are obviously also questions about the capabilities of the
“acquisition workforce.” These are people (in the West are often civilians) who have the
commercial/contracting, financial management and technological expertise needed for the
efficient and effective procurement of defence goods and services. They are able to liaise with
the users of military equipment on the reconciliation of the desires of the latter with what
technology can offer or the existing defence market has available. They also should be able to
deal in an integrated manner with the acquisition of new equipment, its support during its inservice life and its eventual disposal.
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Defence acquisition practices in Croatia should be viewed in terms of the wider defence change
agenda which includes:
The creation of an organisational structure to address defence in a new state: the
organisation of the Ministry of Defence has had to be built, as has the structure of the
General Staff and the command structure;
The down-sizing of the armed forces: this has involved the re-integration of military
personnel into civil society, the ending of conscription, and the establishment of an
educational and training system to support professional forces;
The rationalisation of military sites: this has involved the closure of many bases and
installations as the needs for territorial defence have reduced;
The restructuring of the army especially towards international missions and away from
territorial defence, in line with Croatian defence policy: this has involved aligned the
armed forces towards NATO-endorsed capabilities and force goals.
Policy Guidance
After 2000 Croatia began to pursue membership of both NATO and the European Union. As
part of this effort, Croatia undertook a strategic defence review that resulted in the publication of
a Strategic Defence Review (SDR) in 2005 accompanied by a Strategic Plan for its
implementation approved by the legislature in 2006. Croatia was accepted as a NATO member
in 2008, joined formally in 2009 and by 2010 most of the apparent obstacles to its membership
of the European Union had also been overcome.
The SDR gave high level guidance as to the capabilities to be sought by Croatia and, just as
important, indicates what should not be a priority. The policy concluded that
a conventional attack on Croatia was a low probability;
organised crime and terrorism were significant challenges to the country;1
Croatia’s armed forces should be structured in part so as to be able to contribute to the
maintenance of internal order and reducing the impact of accidents and natural disasters
in the country; and
Croatia’s forces should be designed particularly for participation in a wide range of
international peace support missions.2
1
“A threat and risk assessment indicates that a direct military threat to Croatia is highly unlikely, while nontraditional challenges – such as international terrorism, the proliferation of weapons of mass destruction (WMD),
organised crime, illegal trafficking, disasters and environmental degradation – represent significantly growing
international concerns.” Ministry of Defence, Republic of Croatia, Strategic Defence Review (SDR), Zagreb 2005,
p.6, henceforth referred to as the SDR.
2
An Annex to the SDR gives a full list of CAF missions and tasks, numbering 18 in all, including seven ”tasks in
peace,” two combat tasks, two crisis operations tasks, and participation in three confidence and security building
areas.. The last four tasks comprise types of assistance to domestic civil institutions, see.pp.46-7.
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All these points provided direction for those building the Croatian armed forces and acquiring
the most suitable equipment. Although the SDR and the Long-Term Plan have been to a certain
extent left behind by events, not least the global recession, the direction provided by these
documents remains valid.
The policy’s stance on the low probability of a conventional attack on Croatia also provided
further justification for the rationalisation, re-structuring and down-sizing of the defence
infrastructure within the country. This remains a significant agenda item on the Croatian defence
reform programme, taking high level attention and effort. As in other Western states, the closure
of bases and military installations has local employment and wealth implications, and is therefore
a partially political process.
The rationalisation of military sites also has financial implications for the acquisition programme
since the SDR and the Defence Plan envisaged that significant sums could be raised from the
sale of military estate and that the money involved could be used for defence procurement. The
realism of the revenue gains anticipated from defence property sales was queried by outsiders as
the document was published.3
The SDR also recognised the need to invest in equipment and it laid down a desired
target/pattern in which 20% of the defence budget should be spent on equipment. The other key
elements were 50% for personnel and 30% for operations and support.4
Requirements
Conceptually, Croatia uses the discourse of capability as a foundation for deciding its needs and,
through its SDR, it identified gaps particularly the following areas:
Surveillance, especially its capability to monitor, identify, and track items in its sea and
air space;
Air and maritime operations, specifically in its ability to engage with intruders into its air
and sea space;
Communication, not least in its ability to be able to communicate effectively with other
allied forces on deployed operations; and
Protection, in particular its ability to protect its forces as they move tactically on
deployed operations.
The SDR observed that “precedence will be given to the interoperability requirements” of
contingents to be deployed on multinational operations (primarily communications equipment
and force protection equipment).
3
T.Petz & M.Remillard, Defence Reform and Conversion in Albania, Macedonia and Croatia, Brief No.34, Bonn
International Center for Conversion, p.7 and pp.43-47
4
SDR, p.37.
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The Long-Term Plan indicated that solutions (equipment types) had been identified and endorsed
as a means of filling these gaps. For instance, shore-based radar was recognised as a core
element in maritime surveillance. Ground-based radar was seen as key to the monitoring and
control of air space. In terms of the capability need, the Long-Term Plan included the sort of
technology and system to be acquired. It did not specify the particular product or manufacturer
to be used.
Today there is an articulated process for the generation and adoption of requirements, which in
most cases begins in the single services and the Support Command which annually feed their
inputs as to their perceptions of their future equipment and service needs into the General Staff.
There a further pruning and integration exercise takes place before the General Staff sends the
scheme to the Ministry of Defence, which finalises a plan for the coming year. Within the
General Staff, however, there are sponsors/champions of particular types of requirement, with
the J2 section, for instance, being concerned with communication capabilities among Croatian
units and between Croatian units and allies.
For the more expensive and demanding projects, requirements development goes through four
stages, the first of which is the responsibility of the armed forces and is concerned with the
articulation of a mission need in the light of Croatia’s policy, force goals agreed with NATO and
immediate operational commitments. Each stage is associated with the generation of particular
documents and their approval at a higher level. For the most expensive and important projects,
approval be required at ministerial and even governmental level. The latter operates with regard
to the purchase of 126 armoured vehicles.
Financial Planning
As noted Croatia developed a long term plan for equipment acquisition, covering the period from
2005-15, including detail about what was to be delivered when and a payments schedule. The
SDR and the Long-Term Plan recognised likely resource constraints and gradual rather than
rapid change was recognised as the best to be hoped for. Even in 2005 it accepted that “the
necessary equipping and modernisation target period of the CAF can be extended beyond
2015.”5 The SDR both spoke of the need to spend more on defence in order to achieve
modernisation and recognised the reality that major increases in defence spending were unlikely.
“The dynamics of achieving the required capabilities will depend of Croatia’s ability to fund its
defence reforms in a manner which exceeds the projected 11.84% to 1.87 % of the GDP.... Given
Croatia’s economic and political circumstances, it is difficult and perhaps unrealistic to suggest
that defence budget allocations would exceed 2% of the GDP.”6
Croatia’s procurement planning deals essentially with two types of acquisitions;
Those that can be contracted for and completed within a single year and which often
occur on a regular basis: fuel, many spare parts and food purchases fall into this category;
5
6
SDR, p.37
SDR, p.37
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Those that involve large chunks of expenditure which must be spread over a number of
years: the contracting process itself may take more than a year and a multi-year contract,
tying up future money has to be agreed. The government as a whole, including the
Finance Ministry, must agree to such contracts.
Croatia’s defence planning rested on assumptions about both the share of GDP allocated to
defence and the rate of growth in the economy as a whole. From 2008 the economy did not just
fail to reach the expected growth rate of around 4%, it actually shrank in real terms. Moreover
up to and including 2009 the Croatian defence budget as a whole remained at 1.8% of GDP, and
did not reach the 2% target aspired to in the SDR. Implementation of the plan fell well behind
schedule and further prioritisation exercises proved necessary. In 2010 the Government went
further and cut the defence budget significantly in cash terms, which made all uncommitted
projects vulnerable. The proper equipment of deployed forces became the sole procurement
priority, alongside maintaining deliveries for the armoured vehicle project. Croatia may resort to
searching for a loan of about three years to enable vehicle deliveries to be completed by 2015
and payment completed in 2018.
Thus implementation of the Long Term Plan has had to be flexible both with regard to major
projects and in-year priorities. The procurement of 126 armoured vehicles from Patria has been
recognised as the highest priority along with upgrading the personnel equipment of soldiers
deployed on operations. However, even the armoured vehicles project has involved a reduction
in the requirements and a re-scheduling of deliveries over a longer period in order to maintain the
programmes affordability.
The Ministry if currently engaged on re-visiting the Long-Term Plan to cover the period ending
in 2018 and further changes to the Patria programme may be needed.
While implementation of the Long-Term Plan has fallen behind, it must be recognised that the
content of the plan, reflecting approved policy direction and later linked to NATO force goals for
Croatia, has provided a supportive framework for further prioritisation. Croatia is able to make
constant efforts to adjust its defence programme to the resources available within a rigorous
structure.
Procurement
The MoD also includes a largely civilian Materiel Resources Directorate which is responsible for
the efficient and effective procurement of equipment and services for the Croatian armed forces.
This directorate sits alongside three others addressing finance, human resources, and policy (See
Annex A).
The Materiel Resources Directorate, and in particular its Department for Development,
Equipping & Modernisation (DDE&M), is responsible for the generation of a Technical
Requirement document from the Mission Need Statement/Tactical Requirement, sometimes
using external help from Zagreb University or the research institutes of the armed forces. To use
more general language, the armed forces lead on stage one, the articulation of a user requirement
while the DDE&M addresses the system requirement, i.e. what the system must be able to do to
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meet the user’s needs. It is at this stage that the broad solution to the user need is identified but
not the specific system or manufacturer. If necessary a Feasibility Study is then undertaken
before the fourth stage approval, which is of the Implementation Study: this is a final acquisition
plan including the requirements, procurement approach, life cycle cost estimates, envisaged
support arrangements, training and other elements that might be involved, including
infrastructure investments (The Material Resources Directorate also includes a Property,
Construction and Environmental Protection Department).
Responsibility for drafting and agreeing contracts lies with the specialist Procurement &
Acquisitions Department within the Material Resources Directorate.
In procurement, Croatia has made clear that it will give preference where possible to local
industry, which has some capability in small arms, uniforms and personal soldier equipment
including boots, and ammunition.
Where external suppliers are to be considered, for projects over E2 million in value, Croatia has
an offsets policy that requires that 25% of a project’s value be delivered by Croatian companies,
i.e. 25% of the project must be covered by direct offsets. The remainder of the project’s value
should be addressed by indirect offsets, i.e. compensating purchases of Croatian goods and
services. There is a separate offsets organisation outside the MoD and associated with the
Ministry of Economy which directs the implementation of offset arrangements. To deliver the
armoured vehicles, Patria is working with a local Croatian company.
How the offsets policy is implemented in practice is an evolving matter. We were told that the
25% is a minimum and that the higher the offset offer, the better. In principle any deviation from
the offset requirement must be approved by ministers, who are reluctant to do so because of the
loss of employment opportunities implied. On the other hand, it does not have been applied to
some purchases, for instance of Heckler & Koch rifles and US ammunition, that were made
especially for Croatian troops deployed in Afghanistan. In the assessment schemes associated
with dealing with bids, the offset dimension is weighted alongside other aspects such as price
and performance and the military could be expected to be reluctant to impose clearly inferior
equipment on the forces just because it came with a good offset package.
Procurement (Contracting)
Overview of Croatian Public Procurement. Croatia, as an applicant for admission to the
European Union, has adapted its rules for public and defence procurement to conform to the
Procurement Directives of the European Union (a full 18 months before the EU Member States
were required to make the transition), and it has made very public efforts to improve the
transparency and competitiveness of its public procurement, to include defence procurement.7
Legal Framework for Croatian Public and Defence Procurement. There are basically two
laws governing Croatian defence procurement, the 2007 Public Procurement Act and the 2010
7
The harmonization of national law with the 33 topics (Chapters) of EU law (“Aquis Communautaire) is required
for admission to the EU. To date (1 September 2010), Croatia has successfully negotiated 22 topics (competition is
still being negotiated).
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Defence Regulation. As explained below, these two laws combine to govern contracting that is
subject to the Defence Regulation.
The Croatian Public Procurement Act (PPA).8 This law is based on the European Union’s
Public Procurement Directive 2004/18/EC. The PPA has substantive Articles that track, in
arrangement and language, the EU Directive, as well as the topics and content of the
accompanying Annexes to the EU Directive. The PPA posits all the basic principles of EU
procurement,9 to include charging Contracting Authorities with ensuring the confidentially and
security of the information provided by the private sector in competing for and in executing
contracts. Its definitions match those of the EU, as does its classification of procurement
subjects into works, supplies, and services, and also the rules for categorizing projects that
satisfy more than one classification, and guidelines for estimating the value each type of
procurement effort for purposes of using the applicable rules.
Procurement Procedures. The PPA’s basic procurement methods are the open procedure
where all qualified vendors can tender; restricted and negotiated procedures where the
Contracting Authority selects the applicants who can tender or negotiate; and also the
competitive dialogue. The PPA provides Contracting Authorities with guidance on the selection
of the appropriate procedure and also the authority for using all the modern EU procurement
arrangements such as framework agreements, dynamic purchasing (electronic commerce)
systems, and procurement by a central purchasing authority that can satisfy the needs of several
government customers and contracting authorities. It also provides for the use of electronic
auctions, which can be used in the price competition phase when using open, restricted, and
negotiated procurement methods.10
The 2010 Croatian Defence Procurement Regulation (DefReg). On 21 January 2010, Croatia
adopted a regulation for certain defence procurements, the Defence Regulation (“DefReg”). 11 It
is Croatia’s implementation of the EU 2009 Defence Directive, 2009/81/EC.12
● Applicability of the Defence Regulation. In legal essence, the Defence Regulation
applies to contracts that would be excluded from the normal procurement and competition
requirements under the authority of Article 296 (now Article 346) of the Treaty establishing the
European Union (i.e., if Croatia was a Member of the EU). These are contracts, according the
Defence Directive, that are formally designated as classified; 13 contracts that require, in
8
Public Procurement Act, Act 71-05-03/1-07-2, 10 October 2007
PPA, Art. 6(1). These are to conduct public procurement with regard for the free movement of goods and the
freedom to engage in the sale of services, and the principles of competition, efficiency, equal treatment, nondiscrimination, mutual recognition, proportionality, and transparency.
10
These EU procedures are explained in more detail in Part 3 to the Assessment Report at §2.
11
Regulation 336 on Public Procurement for Defence and Security Purposes, 21 January 2010
12
See Part 3 the Assessment Report at §2. While the Defence Regulation makes no mention of 2009/81/EC, it
clearly is based on, in many places verbatim to, the EU Defence Directive. In fact, its concluding provisions require
that upon Croatia’s accession into the European Union, that the reports required by the Defence Regulation be
provided to the European Union.
13
The Defence Regulation defines “classified information” as any document written, reproduced, drawn, graphic,
printed, filmed, photographed, magnetic, optical, electronic or and other data, recording, measure, procedure, object,
oral notice or information, which has been, according to the prescribed procedure, so designated by a competent
9
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accordance with Croatian law, information security measures;14 and any other contracts that the
Contracting Authority determines need to be procured pursuant to the Defence Regulation “for
the protection of essential security interests.”15 Such contracts would be to procure weapons,
military and police equipment; for military and police material listed in Annex III of the Public
Procurement Act; public service contracts and public works contracts that are directly related to
defence or security; and contracts containing non-military sensitive information.16
● Non-Applicability of the Defence Regulation (Article 3). By its terms, the Defence
Regulation does not apply to contracts for programs of cooperative research and development for
a new product, and if applicable, the later phases of all or part of the life cycle of the product;17
contracts awarded in a third country in support of forces deployed outside the European Union
where the operational needs require that they be entered into with local vendors;18 and contracts
awarded by Croatian government bodies, blow the national government, to regional authorities
of a Member State or a third country.19
● Applicability of the Public Procurement Act to Procurement Under the Defence
Regulation. The Defence Regulation specifies that as to matters concerning the preparation,
implementation, and completion of the procurement procedure, if the matter is not addressed in
the Defence Directive, that the Public Procurement Act applies.20 Therefore, as an example,
matters such as how to classify a procurement – including procurements that involve more than
one type of effort – and how estimate the value of a procurement, are not addressed in the
Defence Regulation, are therefore governed by the Public Procurement Act.
Procurement Procedures Under the Defence Regulation. Contracting Authorities may
“freely choose” between the restricted procedure of the negotiated procedure.21 In certain cases,
the Contracting Authority may employ the directed negotiated procedure. There is no mention
of the dialogue procedure in the Croatian Defence Regulation.
● Restricted and Negotiated Procedures. In both the restricted and negotiated procedure,
there is a two-step process. It begins with the Contracting Authority inviting economic operators
of its choice to participate, and then reviewing their initial submissions to make a selection (in
accordance with the stated criteria) of those with whom it will continue the procedure. In the
restricted procedure, selected vendors are invited to submit a tender, and in the negotiated
authority, and to which a certain level of confidentiality has been attributed, as well as the information designated as
such that is submitted to the Republic of Croatia by another state. DefReg. Art. 2 (1)
14
DefReg., Art. 1(1)
15
This language in the Defence Regulation mirrors the standard for exemption from the Public Procurement Law in
Art. 10(3).
16
DefReg., Art 1(2)
17
DefReg., Art. 3(1)
18
DefReg. Art. 3(2). Note that Croatia has clearly written its defence regulation upon the assumption that it will
soon be admitted to the EU.
19
DefReg. Art. 3(3)
20
DefReg., Art. 1(3). This admirable clarification removes any doubt concerning the role of the two laws.
21
DefReg., Art. 5(1). This is also the correct interpretation of the EU Defence Directive, but the Croatian Defence
Regulation clearly specifies that the Contracting Authority has this choice without restriction.
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procedure the selected vendors are invited to negotiate and finally to submit a tender (although
the number of those invited to tender may not include all who were invited to negotiate). The
Defence Regulation provides clear direction on the conduct of these processes. 22 The
information to be contained in the invitation will include, in addition to adequate information
about the requirement and the necessary specifications, the selection criteria for the second step
and the means of providing satisfactory proof, the number of candidates to be invited (if it is to
be limited), any subcontracting requirements, any security requirements, and the contract award
criteria.23 Depending on certain factors, the minimum number of economic operators is required
to be between 3 and 5.24
● Direct Negotiated Procedures. These procedures involve less competition and require
less time. To guard against abuses, the Contracting Authority must justify the use of this
procedure,25 and, if practicable, conduct the procedure with several economic operators. 26 The
procedure is two-step as in the case of restricted and negotiated procurement,27 but a first step
response that satisfies all the requirements may be treated as the final tender.28 Direct negotiated
procedures may be employed where the regular restricted or negotiated procedures have failed to
produce a suitable tender or contractor;29 where the time limits for the use of restricted or
negotiated procedures are incompatible with an urgency caused by a crisis,30 or by an “extreme
urgency,” that is unforeseen;31 where technical reasons or proprietary rights limit the choice of
contractors;32 where additional purchases from the contractor, which were unforeseen at the
outset, have become necessary, and circumstances warrant that these purchases be made from the
initial contractor because of technical, economic, or operational reasons;33 for research and
development services;34 in the case of additional orders for the same procurement, provided that
the possibility of additional orders was in the notice for the original contract (i.e., options); 35 for
products manufactured purely for research, development, or testing;36 for additional purchases
22
DefReg., Art. 6
DefReg., Art. 6(3)
24
DefReg., Art. 6(1) and (2)
25
DefReg. Art. 14(1)
26
DefReg. Art. 14(2)
27
DefReg. Art. 14(3)-(8). However, many of the rules for restricted and negotiated procurement may be waived in
cases where the reason for the direct negotiated procedure is urgency, DefReg. Art. 14(10)
28
DefReg. Art. 14(9)
29
DefReg. Art. 11(1) and (2)(works), Art. 12(1) and (2)(supply), Art. 13(1) and (2)(services)
30
Art. 11(3)(works), Art. 12(3)(supply), and Art. 13(3)(services). A “crisis” is “any situation in Croatia, [EU]
Member State, or third country in which a harmful event has occurred that clearly exceeds the dimensions of
harmful events in everyday life, and which substantially endangers or restricts the life and health of people, or has a
substantial impact on property values, or requires measures in order to supply the population with necessities.” Art.
2(4)
31
DefReg. Art. 17(4)(works), Art. 12(4)(supply), and Art. 13(4)(services). The Regulation adds that this urgency
cannot be due to the Contracting Authority’s action.
32
DefReg. Art. 11(5)(works), Art. 12(5)(supply), and Art. 13(5)(services)
33
DefReg. Art. 11(6) and Art. 13(7)(supply)
34
DefReg. Art. 13(6)(services)
35
DefReg. Art. 11(7)(works) and Art. 13(8)(services)
36
DefReg. Art. 12(6)(supply)
23
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intended as a partial replacement, or under conditions where a change in suppliers would result
in incompatibilities and “disproportionate technical difficulties;”37 for supplies quoted and
purchased on the commodity market;38 where the supplies are available on very advantageous
terms, such as in the case of a business that is being liquidated;39 and for the procurement of air
and maritime transport services for armed forces being deployed, and the time limits of the
restricted or negotiated procurements do not satisfy the schedule, and the contract is for a short
duration.40
Award Criteria. The criteria is either lowest price or the most economically advantageous. 41 In
a direct negotiated procedure, the criteria would almost always be most economically
advantageous.
Security Provisions in the Croatian Defence Regulation. The explicit authority for
Contracting Authorities to impose security requirements on contractors and subcontractors, as
well as requiring an assurance of continuity of supply, as a condition of contract award is a main
feature of the 2009 EU Defence Directive initiative. The Croatian Defence Directive clearly
transposes that authority into its national law.
Security of Classified Information. If the tendering process or contract execution requires that
the candidates, tenderers, or contractors be provided with classified information, the Contracting
Authority can impose security obligations on them.42 These requirements may be based upon the
national level of classification, and may require the economic operator to possess the requisite
security clearance.43
Security of Supply. The Contracting Authority may require those wishing to participate, to
include their subcontractors and supply chain sources, to meet specific standards of management
concerning export control compliance;44 insure continuity of supply during a crisis;45 and comply
with special restrictions on the disclosure, transfer, or use of the supplies.46. The Contracting
Authority may also require economic operators to commit to, and to prove their ability to effect,
the maintenance, modernization, and adaptation of the supplies.47 The Contracting Authority
may establish the type of proof needed to demonstrate these two types of qualifications and
capabilities,48 which may include certification from the participant’s national government.
37
DefReg. Art. 12(7)(supply). In these cases, the extension may not exceed five years, except in exceptional
circumstances.
38
DefReg. Art. 12(8) (supply)
39
DefReg. Art. 12(9)(supply)
40
DefReg. Art. 13(9)(services)
41
DefReg. Art. 34(2)
42
DefReg. Art. 17(1) and (2)
43
DefReg. Art. 17(3)-(6)
44
DefReg. Art. 17(2)1. The standards cannot be higher than the applicable national export license criteria, DefReg.
Art. 17(3)
45
DefReg. Art. 17(2)4
46
DefReg. Art. 17(2)2
47
DefReg. Art. 17(2)6
48
DefReg. Art. 17(2)3
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Significantly, and not quite based on the 2009 EU Defence Directive (but not contrary to it) the
Contracting Officer can require the contractor to commit, “according to terms and conditions to
be agreed,” to provide “all specific means necessary for the production of spare parts,
components, assemblies and special testing equipment, including technical drawings, licenses
and instructions for use,” in the event that the contractor is no longer able to provide the
supplies.49
Exclusions (Article 21) and Qualifications of Contractors (Article 22-25). The Regulation
follows the 2009 EU Defence Directive regarding exclusions and qualifications of contractors.
The Defence the Regulation permits the Contracting Authority to exclude any party, “on the
basis of any means of evidence, including protected data sources, [that does not] possess the
reliability necessary to exclude risks to the security of the Republic of Croatia.”50 The
Contracting Authority sets the qualifications and the methods of proof and acceptable evidence.51
The matters to be evaluated include technical ability and professional qualifications,52 and
quality and environmental management.53
Subcontracting (Articles 26-33). The Regulation follows the EU Defence Directive on
subcontracting. This begins with the proposition that the contractor is free to select
subcontractors. However, the Contracting Authority may require subcontracting; may require
the contractor to report subcontracting plans and potential subcontractors; and may require proof
of the subcontractors’ qualifications. The Defence Regulation is clear that the requirements on
the handling and safeguarding of classified information apply to subcontractors,54 and that a
subcontract does not relieve a contractor from its contractual liability.55
Standstill Period (Article 34). The Contracting Authority must effect a standstill period upon
the receipt of the award decision by the tenderers.56 That period is between 5 and 15 days
depending on the value of the contract to be awarded.57
Remedies (Article 35). The Regulation provides that the legal recourse to challenge (appeal) a
Contracting Authority’s decision is under the Public Procurement Act.58 Under the PPA, appeals
regarding procurement are assigned to the State Commission for the Supervision of Public
Procurement Procedures, which operates under special rules for procurement disputes.59 Those
who have a legal interest may bring an appeal, as well as the Public Procurement Office of the
49
DefReg. Art. 17(2)8
DefReg. Art. 21(4)
51
DefReg. Art. 22(1), except for criminal records and legal and business capacity, which are governed by the
Public Procurement Act, DefReg. Art. 22(5)
52
DefReg. Art. 23
53
DefReg. Arts. 24 and 25, respectively
54
DefReg. Art. 29(3)
55
DefReg. Art. 29(2)
56
DefReg. Art. 34(4)
57
DefReg. Art. 34(5) and (6). There is no standstill if the contract is under direct negotiated procedures with one
source, DefReg., Art. 34(7).
58
DefReg. Art. 35
59
PPA, Art. 134(1)
50
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Government of the Republic of Croatia and/or the State Attorney's Office. 60 The winning
contractor – i.e., in cases where an awarded contract is appealed - may also participate in the
proceedings.61 The PPA clearly specifies the manner of filing an appeal, 62 which begins with the
Contracting Authority;63 the contents of an appeal;64 the rules for obtaining and presenting
evidence; and the grounds that constitute substantial violations of the Act.65 The basic remedies
for an error are prohibiting the contract award and correcting any errors. 66 There is a fee for
initiating an appeal.67 It is not oppressive, but it appears adequate enough to discourage
frivolous or malicious appeals. Also, the rules provide that the successful party in an appeal is
entitled to have its costs reimbursed by the other party. 68 The PPA admirably sanctions
settlements (with the Commission’s approval69) and self-initiated corrective actions by the
Contracting Authority.70 The proceedings before the Commission can include a hearing, 71 and
there is a record of the proceedings.72 The decision of the Commission is subject to judicial
review,73 and the law provides for the remedy of nullifying an improper contract on certain
grounds.74 Overall, Croatia’s PPA, since it applies to defence contracting, provides considerable
legal protection to an aggrieved contractor.75
The Croatian Defence Acquisition Workforce. The Croatian armed forces were formed to an
extent by volunteers with valuable managerial experience in the civilian world who joined the
struggle for independence from 1991. Some of these people are still serving in senior armed
forces positions. Their technical and managerial experience remains available to the government
defence sector. There is, however, a question of whether the next generation of military staff
will have a similar background in management or awareness of the commercial world. The
procurement staff is relatively young (30/40s) and mostly came from other assignments within
the MOD, but they are knowledgeable of their tenets for public procurement.76
60
PPA, Art. 137
PPA, Art. 155
62
PPA, Art. 145
63
PPA, Art. 147. How the Contracting Authority processes an appeal is governed at PPA, Art. 146.
64
PPA, Art. 143
65
PPA, Art. 140. For example, making an award to an unqualified tenderer, PPA, Art. 140(8).
66
PPA, Arts. 148-151
67
PPA, Art. 58
68
PPA, Art. 159. The Commission has the authority to apportion this based on the equities.
69
PPA, Art. 152
70
PPA, Art. 153
71
PPA, Art. 161
72
PPA, Art. 160
73
PPA, Art. 162
74
PPA, Art. 164. These include, of note, that the Contracting Authority maneuvered the procurement so as to keep
its value below the appropriate threshold so as to avoid the proper procedures, and that an improper amendment was
made to a contract.
75
American lawyers with clients in or attempting to penetrate the Croatian market advise that appeals are
uncommon; not because contractors doubt the integrity of the legal system, but rather are concerned with
recrimination on behalf of Contracting Authorities.
76
For example, when we asked whether Croatia had a standard contract term that would let the Government amend
a contract, we were greeted with immediate cautions that such a change with an incumbent’s contract could violate
the principles of competition.
61
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Transparency Initiatives. Private sector sources who have, or seek, contracting opportunities
in Croatia, and who otherwise observe trends in its public procurement, give favorable marks to
Croatia’s efforts at improving transparency and instilling a culture of competition. In particular,
they note a Transparency International conference, “Curbing Corruption in Defence
Procurement,” conducted in Zagreb in February 2007 under the enthusiastic sponsorship of the
Croatian government, as indicative of Croatia’s commitment in this regard. The conference was
marked by candid and encouraging exchanges and presentations, to include the remarks of a
senior Croatian official who acknowledged that Croatia’s public procurement system was
“young,” and who described its defence contracting as the “last fortress” [i.e., against
competition],77 and by another Croatian official who acknowledged that Croatian defence
procurement had been marked by “excessive secrecy,” and who stated that exemptions from
normal procurement rules should be limited because they create an environment that facilitates
corruption. Also noted was that the President of Croatia had publicly criticized “on several
occasions,” “the lack of transparency in the procedure of procurement of military equipment.”78
Test and Acceptance
Formally this is the responsibility within the Material Resources Directorate of the Receipt and
Support Department, which examines delivered goods and checks that they meet the terms of the
relevant contract. It confirms that payment can be made.
For the development of some personal equipment for soldiers, a more protracted and integrated
development and acceptance approach has been used.
To generate a standard and highly quality boot, Croatia developed a broad quality requirement
which was issued to several companies in Croatia. The country has a significant shoe industry
and a standard competition would have been possible. However the approach taken was to buy a
number of boots from a number of manufacturers, and these were then issued to soldiers.
Soldiers used them and were invited to feedback their responses to the strengths and weaknesses
of their boots, using a structured, written questionnaire. Armed with the feedback, the ministry
encouraged the competing companies to form a consortium and to develop a boot with
weaknesses minimised and strengths maximised. The claimed result is that Croatian forces are
today issued with a very high quality boot into which the Croatian competitors have supplied
their strongest components and where the companies themselves have agreed their work share.
We were assured that a similar approach was used successfully for the development and eventual
acceptance of a rifle, a pistol and elements of battledress.
Logistical Support
Croatia claims to take support needs fully into account is fully considered from an early stage in
the acquisition cycle, although the national concept of the project acquisition ends with
77
Remarks of Mr. Goran Matesic, Head of the State Commission for Supervision of Public Procurement Procedure,
at p. 2 of the Conference Report.
78
Remarks of Ms. Visnja Tafra, Assistant to the Political Affairs Advisor, Office of the President of Croatia, at
Appendix 2 of the Conference Report.
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acceptance of the product delivered from industry. The final approval point for a project
certainly includes reference to integrated logistics support, and the ministry certainly makes
efforts to understand the costs of owning as well as buying equipment.
People as well as equipment need support and in the US and the UK particularly there is a policy
judgement that the private sector is normally more efficient than the public sector in generating
goods and services. This has led these and other Western governments to contract to outside
bodies for the delivery of many goods and services, including many in the defence area.
Croatia considered this approach in its early years but then concluded that using the private
sector involved higher costs than cheap (conscript) military labour for which it anyway needed to
find useful work. It is salient that Croatia has been downsizing its armed forces since
independence. Despite cutting its forces by 23,000 between 2006 and 2009, its forces are still at
least one thousand above the target of 16,000. Outsourcing or equipment support to secure
efficiencies is therefore not a widespread practice in Croatia and state ownership of munitions
factories remains in place. There is some recognition that the involvement of military personnel
in such activities as facilities maintenance may have compromised the military effectiveness of
the people involved.
Much responsibility for support lies with a support command within the armed forces concerned
primarily with the purchase, storage and transport of goods needed by military units (their people
and their equipment). The maintenance and some repair of the equipment of the armed forces
lies with the individual services, which use the goods provided by the Support Command. The
latter essentially constitutes a tri-service logistics agency providing the single services with their
needs.
Overall oversight and responsibility within the military for logistics lies with J4 section of the
Central Command. This organisation seeks to ensure that the necessary provision has been
made, but does not control the funds associated with its delivery.
From Kit to Capability
The Croatian military ensures that the training, support and infrastructure needed before
equipment can form part of useful capability are taken into account in acquisition planning.
However, there is no explicit use of an explicit and comprehensive framework such as the US
DOTMLPF or the UK Defence Lines of Development structures.
Clearly Croatia is still developing its defence management concepts and structures and to date
has no experience of the “disruptive technologies” that may require different sorts of people to
be recruited and trained, new organisations to be established, novel doctrine developed and so
on. Looking forward, while interoperability with NATO communications is sought, Croatia has
no equivalent to the radical plans for infantry soldier equipment that can be found in the UK,
France, Germany and the US for example, plans that raise many questions about the necessary
future intellectual and physical attributes of soldiers, as well as how they will be organised and
operate. Croatia still approaches the development of kit into capability in the ad hoc way that
armed forces have used over centuries.
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Summary Observations
In the immediate term, defence acquisition may not be an immediate priority for Croatia. Other
areas, especially the down-sizing of the armed forces, the rationalisation of defence sites, the
building of professional defence education and improved governance, must be further addressed.
The officers and officials we met in Croatia were positive about the country’s acquisition
experience to date, about the organisational arrangements and processes that had been built from
scratch, and about the purchases made. This had been achieved alongside advances on other
fronts: successfully addressed in reducing armed forces of 250,000 some years ago to some
17,000 today; simplifying the equipment inventory; and developing a military academy and other
training and educational provision.
'Defence acquisition is a most demanding governmental activity requiring extensive foresight
and the coordination of many areas of defence organisations. Consequentially, all countries have
problems with it. However we would emphasise that the financial crisis, which has disrupted the
plans of many of the countries dealt with here, has given some practitioners the sense that their
only real acquisition problems are financial. If only more money were to be available, they
would not expect the area to be particularly problematic. This is an understandable but shortsighted perspective, and since 1997 it has probably been the UK which has led the way in
seeking to identify all the things which need to go well if defence acquisition is to prove
effective and efficient. '
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Chapter 3
The Czech Republic
Introduction and Policy Guidance
The Czech Republic is a small country with a population of just over 10 million. Its economy
has grown rapidly since the end of the Cold War, and its per capita income in 2009 exceeded
$20,000 (despite negative growth of 4.3% in that particular year). But this still meant its total
GDP was less than one third of the US defence budget, so the scale of defence effort is clearly
limited. Its defence budget is only 1.4% of GDP and, with armaments being allocated just 16%
of that sum, its annual expenditure on armaments is just over $500 million a year.
Like other former Warsaw Pact states, the Czech Republic aimed to generate a major defence
change programme once it escaped domination by Moscow and the Warsaw Pact in 1989-90. In
terms of equipment, it tried to move from Soviet equipment to items that are of Western origin, a
process that is far from complete. The country still operates a large amount of equipment,
including armoured vehicles and helicopters, acquired during the Warsaw Pact years.1 It has and
professionalized and down-sized its armed forces to about 10% of their Cold War size; it has
accommodated a rather amicable separation from Slovakia; and it has re-oriented its forces to
contribute to security on the global scale. Its main 2010 deployment was of around 600 people
in Afghanistan.
As regards policy guidance, the country has developed a formal Security Strategy and a Military
Strategy of the Czech Republic. The latter makes clear that the country looks to international
cooperation, and in particular NATO. for its security: “in the current security environment,
collective defence within NATO is the only effective, efficient and credible means of defence of
the Czech Republic,”2 and there is particular expression of Czech readiness to play its part in the
collective air and missile defences generated through NATO. Officials indicated to us that the
Czech Republic may refine its policy in the light of what eventually emerges in the new NATO
Strategic Concept.
Within Europe, there are veiled references to the policies of Russia thinly disguised in references
such as “disruption or deliberate cut-off of strategic resources flows or disputes over their
control” and “abuse of information and information technologies.” However, the wider tone is
confident: “a large-scale conventional conflict in the territories of NATO or EU member states is
still highly unlikely in the foreseeable future. Such a threat would be identified well in advance
and therefore met with effective countermeasures.”3
The document endorses the approach of intervention to deal with threats to Czech and allied
security: “active preparation in such operations is therefore essential for safeguarding of security
1
See International Institute for Strategic Studies, The Military Balance 2010, London, Routledge, pp.125-6
The Military Strategy of the Czech Republic, 2008, ¶7, http://www.army.cz/scripts/detail.php?id=5819
3
The Military Strategy of the Czech Republic, 2008, ¶3, http://www.army.cz/scripts/detail.php?id=5819
2
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interests of Czech Republic and holds a correspondingly high place in the priority list of the
Armed Forces.”4 The population as a whole struggles to internalise this thinking since this is a
land-locked country with experience of invasion and occupation, and the popular tendency is to
think of the primary role of the armed forces as homeland defence. In the absence of a direct
threat it is hard to generate popular support for defence spending to enable the deployment of
forces. At the highest political level, there must be questions about how seriously defence is
taken in comparison say to economic matters of growth and employment (see the last footnote in
this Chapter). In 2002 Prague developed a 15 year defence transformation plan, but the
anticipated budget has not materialised and implementation has lagged. The Czech Republic has
however, met the Istanbul force goals of having 11% of its forces available for deployment.
The official strategy is that the immediate operational equipment needs of the Armed Forces
should be prioritised and includes a plea for future spending. The Strategy states:
Defence of the Czech Republic necessitates adequate and unfluctuating funding
allotted especially for the development of those elements of the Armed Forces that
are to be utilised in the most likely operations. The defence budget will over the
coming years have to correspond to the level adequate to fulfill the declared
political-military ambitions, solve the urgent necessity of modernisation of legacy
equipment, cover training requirements and infrastructure investments, and enable
the Czech Republic to actively participate in NATO and EU activities in the time
when both organisations increase the scale and scope of their engagement.5
The political-military ambition of the Czech Republic’s scale of effort is defined as the ability to
generate a medium mechanized brigade with appropriate air elements for a NATO collective
defence operation. Non-Article 5 tasks are seen as the most likely and the Czech Republic aims
principally to be able to deploy organic units, in particular a brigade-sized task force for six
months without rotation, a sustainable battalion task-force, and a sustainable company task force.
It also aims to be able to deploy specialised task forces for other operations.6 Given electoral
results and the wider economic context, it seems unlikely that the Czech defence budget will do
better than maintain its current share of GDP, and it may do worse.
In terms of capability development, there is emphasis on NATO standards, on the ability of land
and air forces to work together, on flexibility and modularity, and on the ability of Czech forces
to be able to work with civilian elements. From an acquisition perspective, it is significant that
the Czech Republic does not aspire to develop comprehensive forces, and accepts a readiness to
depend on allies for some elements. It is also understood to be looking to harmonise and
integrate its efforts in some fields with those of Slovakia7. However, it intends to maintain its
“significant international position” with regard to defence against chemical, biological,
radiological and nuclear weapons8. However the strategy is vague with regard to the
4
The Military Strategy of the Czech Republic, 2008, ¶9, http://www.army.cz/scripts/detail.php?id=5819
The Military Strategy of the Czech Republic, 2008, ¶10, http://www.army.cz/scripts/detail.php?id=5819
6
The Military Strategy of the Czech Republic, 2008, ¶13. http://www.army.cz/scripts/detail.php?id=5819
7
“Czech republic and Slovakia look to defence cooperation,” Jane’s Defence Weekly, 18 August 2010.
8
The Military Strategy of the Czech Republic, 2008, ¶15, http://www.army.cz/scripts/detail.php?id=5819
5
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development of equipment-based priorities, observing that while “the Armed Forces shall focus
primarily on strengthening deployable capabilities. Modernisation efforts shall mitigate the
generational obsolescence of weapon and support systems as available funds allow and with due
regard to the priorities of the Armed Forces development.”9
The Role of the Czech Legislature in Defence Acquisition
Under the Czech constitution, the government consists of elected members of the party or parties
that can command a majority in the legislature. At the time of drafting, a general election had
just been held and a new coalition was in the process of formation.
The Czech Parliament receives the budget request annually from the Government, and debates
and amends it. The legislature undertakes more than a rubber-stamp exercise with regard to the
budget. The legislature obviously creates law about the armed forces and public procurement,
and is in the process of bringing the EU directives on defence trade and technology transfer into
their national legislation.
With regard to programmes seen as “strategic,” i.e. with a value over about $50 million, the
legislature plays an endorsing and approving role. There is a Security Committee in the
parliament that leads on the oversight of defence matters. However, its last chairman was a close
ally of the defence minister, and the political links between the ruling coalition and the
committee’s membership may temper its rigour. The legislature does not appear to have the
reputation of acting as a challenging oversight body with regard to defence. The Security
Committee is apprised annually of many of the details of the Medium-Term Plan at the
programme level (e.g. soldier modernisation, air defence modernisation etc).
The Czech Republic does have an audit body which can be directed by parliament. However,
many of its reports in the defence area are kept secret and not published.
Requirements Generation
The Czech Republic is aware of the value of modelling and simulation as a support for the
generation of appropriate requirements.10 It also underlines the need to understand likely future
trends in technological development,11 although spending in this area is extremely modest. Like
other countries studied in this Comparative Assessment, including Poland, the Czech Republic
looks to its involvement in European Defence Agency research programmes as a means of
increasing its expertise at very modest cost. The country aims to spend 1% of its defence budget
on research and technology.
The Czech Republic formally operates a single armed force (normally translated as the Army of
the Czech Republic) with Land forces, Air Force and Joint Support units being among the
components of this force. The Army of the Czech Republic is directed by a General Staff which
9
The Military Strategy of the Czech Republic, 2008, ¶19
Deputy Minister of Defence for Armaments Jan Koriva, Defence Management Journal, Issue 48
11
Deputy Minister of Defence for Armaments Jan Koriva, Defence Management Journal, Issue 48
10
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has the lead on the specification of functional requirements. Within the Ministry of Defence
there is a Strategic Policy section under the First Deputy Minister that includes concern with
specific capabilities and where a capability director role seems to be emerging. At the Ministry
of Defence level the Czech Republic is seeking to move towards a more structured, capabilitiescentred approach to requirements generation based on policy direction leading to the generation
of approved scenarios, followed in turn by simulations and operational analysis which would
support the definition and validation of requirements. Use is already made of the approximately
38 NATO-approved Planning Situations as guidance.
This may not fit comfortably with the General Staff, and in particular the Operations Command
which has had the main role in requirements generation and definition, as well as training and the
preparation of ready forces. In preparing requirements, the General Staff frequently responds to
lessons learned on operations and feedback from theatres and we were informed that operational
experience was the main source of requirements.
A related and perhaps integrating development is that the Czech MoD is developing a structure
in which the armed forces have two high level tasks, territorial defence and participation in
deployed operations. These tasks are sub-divided into 20 sub-tasks from which a more detailed
200 sub-sub-tasks are derived. The intention is that the capabilities needed to execute these tasks
would justify individual acquisitions and the capabilities they may possible. “Target oriented
planning,” as it was described, should be introduced in the 2012-16 period with the aim being to
match financial resources to individual capabilities and tasks. It is recognised that financial
restrictions may require the prioritisation of tasks and acceptance that some services/capabilities
will be provided by allies and friends.
There is awareness in the country of the difficulties of a military customer/user precisely
communicating its needs in writing to a potential supplier. While there is some appreciation of
the distinction between a functional and a technical specification, the Czech Republic does not
(appear to) use any rigorous engineered approach to requirements. We were told that
requirement documents tend to be a mix of the functional and the technical.
On occasions the Czech Republic has accepted requirements that primarily give benefit to the
country’s industry, as was the case with the T.72 tank modernisation and the L.159 programmes
(see Industry section below)
The process for requirements generation is evolving in a search for improvement and, as one
official told us, “We are not close to the optimum.”
Requirements are developed with feasibility in mind through involvement of staff from the MoD
Armaments Department (with eventual responsibility for procurement) with the General Staff
officers. Officially “project teams” are in being although these comprise mainly different
stakeholders coming together for regular meetings rather than co-location of staff, let along the
arrangement of a full-time multi-disciplinary team under a specified lead. But, by collecting
information about military need and procurement opportunity, the Operations staff can generate
a case to present for approval first to the Chief of the General Staff and then the Minister.
Affordability as well as need has to be demonstrated and this is achieved by showing that a
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project can be accommodated within the Medium-Term Plan (see below under Planning and
Affordability).
Planning and Affordability
One of our interviewees argued that effective planning, which gave a multi-year perspective
while allowing amendments to reflect budgetary and other changes within defence and
developments in the wider world, was the central challenge of effective acquisition management.
The Czech Republic operates a six-year rolling “Mid-Term” Plan which covers all defence and
which is communicated each year to the Parliament’s Security Committee (whose members are
cleared to receive classified information). The Finance Ministry is also aware of the
development of the Plan. The plan covers calendar years and normally the draft plan is
completed by June of the year before the plan commences. The Government passes its budget
proposals to the legislature in September, proposals which can be and are amended by parliament
which approves the final budget in the first part of December. This means that short notice
changes to the Plan may need to be made.
Once a project has ministerial approval and has been shown to be affordable through its
inclusion in the Six-Year Plan, it has de facto approved status.
Unlike the UK, those involved in writing requirements have no direct responsibility for
managing the funding involved, which is a MoD Finance Department task. This may explain the
common enthusiasm of military officers for numerous modifications to equipment which would
be available “off-the-shelf.”
Because funds available for defence have turned out to be less than the MoD had hoped, because
changes in the external world have created changing demands on the armed forces, and because
the Czech Republic has strict rules on payment being made only for work completed, the MoD
has to be agile in implementing and adjusting the plan. Unlike the US or UK defence ministries,
the Czech MoD is expected to conduct military operations from the funds provided in the main
budget. Thus when an urgent requirement arises or a new commitment is taken on (such as the
one to support UK forces with three transport helicopters in Afghanistan), spending intentions
within the budget must be adjusted. More generally, money that cannot be spent on one project
that proceeds slower than expected must be moved to a related area or lost. Money for the slow
project has to be found in the following year, and so on. Finally money is not counted as “spent”
until funds are transferred: payments that are committed/obligated through the signature of a
contract do not qualify as spending. All this requires flexibility in the implementation of the
Mid-Term Plan.
In terms of financial planning, while the Ministry has experience of effectively managing the
equipment line of the budget, its ability to understand all lines of development and their interrelationships is more doubtful, as it is in many countries. For instance, assume an old, unreliable
system is in service which costs a lot to maintain but carries a low training bill. Officials
recognise that they would struggle to build into plans all the costs associated with its replacement
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by a modern, more capable communications system which required much more training and
much less repair.
Procurement
The Deputy Minister for Armaments in the Ministry of Defence has an Armaments Department
which undertakes equipment procurement for the armed forces, although technically other bodies
legally can procure things within the MoD (including the Military Police, the Intelligence
Service, the Military Support Command and an Operations Procurement body). The main
procurement body has lawyers and contracts specialists, engineering and technical expertise, and
financial managers who, as noted, work in informal project teams. The highest level of project
direction is treated on an ad hoc basis. The Deputy Minister for Armaments looks after most
cases but the most sensitive and large projects may be placed under the First Deputy Minister.
This was the case with the fast jet acquisition and the Steyr fleet
The Defence Ministry in the Czech Republic has accepted commitments towards open
competitive tendering and a more open European defence market by committing to the EU. It
stresses that Open Procedures and Negotiated Procedures are most common, but is allowed
exemptions from open competition when the release of classified information is involved, when
weapons are involved, when the contract subject matter is R&D, or when the rights of the
country’s military enterprises are involved (see below in the Industry section). The Ministry has
something of a reputation in the country for taking full advantage of its rights not to use
competitive tendering. We were told that project documentation is prepared only in the Czech
language.
Much of the evaluation of bids is led by the user’s scrutiny of performance. There is much
emphasis on the role of testing, and little stress on the Czech ability to understand and assess the
technology involved. Major systems are evaluated on the basis of value rather than just price
and bidders are told in advance of the assessment scheme to be used. Even with testing,
misjudgements can be made: the Czech Republic opted for the well-protected Dingo for use in
Afghanistan and 20 were bought. However, because of their weight, they lacked agility once
some modifications had been added. The government is now looking to 4x4 vehicles from
IVECO.
The Czech Republic in 2010 was being investigated by the European Commission for its May
2009 purchase without a competition of four CN.295 transport aircraft from CASA, so that
Finmeccanica did not have the chance to offer an Italian aircraft, the G.91. As this report was
being drafted, Czech officials hope that the Commission will be satisfied that the purchase was
for a pressing operational requirement in Afghanistan and that CASA/Airbus offered particularly
good terms in being ready to accept five L.159 trainer aircraft in payment for one of the
CN.295s.
There is enthusiasm for offset arrangements, not least as a source of technology transfer, and the
country demands 100% defence offset on all deals (“we don’t export retsina” as payment for
defence equipment). There is a commission that checks the validity of offset arrangements. The
government also requires that 30% of offsets go to SMEs.
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Corruption remains a significant concern in the Czech Republic with Western defence companies
regularly reporting that they are asked to pay bribes while seeking to make sales to the Czech
Ministry of Defence. One Western industrial figure described it as the worst country in Europe
with which to do defence business. Procurements made without a formal competitive tendering
arrangement may therefore be viewed with particular suspicion. As a small country, it is easy for
close personal relations to develop among leading political, military and industrial figures and
ministers often control corruption investigations.
Defence Procurement (Contracting)
Overview of Czech Defence Procurement. The Czech Republic employs the basic
procurement rules and processes of the European Union, 2004/18/EC, and it is in the process of
transposing the 2009 EU Defence Directive into its national law.12
Principles of Czech Public Procurement. The Act on Public Procurement (APP) posits the EU
principles of transparency, equal treatment of vendors, and non-discrimination.13 Also,
Contracting Authorities are required to insure the confidentiality and security of materials
submitted to them by tenderers, especially data that is proprietary or encompasses a trade
secret.14
Legal Framework for Czech Defence Procurement
● Public Procurement in General. All public procurement in the Czech Republic is
governed by a diverse collection of national legislation and authorities. Its main procurement
law is the Act on Public Procurement15 The Czech Republic is a Member State of the European
Union, and, as such, has implemented the EU Public Sector Procurement Directive, 2004/18/EC
into its APP. The noteworthy modifications to the current APP since its enactment in 2006 have
been the reorganization of procurement authority and responsibilities within the government and
certain remedial actions that were taken to correct infringements of EU or non-compliance with
EU rules.16 In addition to legislation, the Czech Office for the Protection of Competition is the
supervisory authority for public procurement, and it renders advisory opinions as well as
exercises authority in complaints.
● Defence Procurement. As a member of the European Union, the Czech Republic is
bound to apply EU law (aquis communautaire), which prohibits discrimination in public
procurement. Its APP applies to all procurement, even defence procurement, unless the
Government invokes Article 296 (now 346) of the EU Treaty, and the APP implements that
12
See Part III to this Assessment on the European Union’s 2009 Defence Directive
APP, §6
14
APP, §122, §148 and §152
15
Act No. 137/2006, 1 July 2006, replacing the former Act on Public Procurement, Act No. 40/2004
16
For example, Act No. 110/2007, 1 June 2007 (transferring duties and authority from the Ministry of Informatics
to the Ministry of Internal Affairs), Act No. 296/2007, 1 January 2008 (implementing new rules concerning the
solvency of contractors); Act No. 76/2008, 15 March 2008 (a remedial change in response to the EU); and Act No.
124/2008, 19 March 2008 (affecting changes in the register of offending contractors).
13
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authority by exempting its application for the procurement of military material and equipment,
“when necessary for ensuring primary national security interests.”17 However, in this regard, the
Czech Republic is in the process of transposing the 2009 EU Defence Directive, 2009/81/EC,
which establishes a defence procurement regime that is intended to minimize the use of Article
296.18 Also, as it effects Czech defence acquisition and procurement, the Czech Republic is a
subscribing participant in the European Defence Agency’s Code of Conduct,19 which requires
reporting certain defence procurements to the EDA which the subscribing Member has exempted
under Article 296. The Czech Republic is also a subscribing participant to the EDA’s Code on
Offsets, which discourages offsets unless they facilitate strategic EU goals, and this may require
a re-thinking, and perhaps prompt changes in, the Czech Republic’s offset practices. 20 Also
affecting defence procurement, albeit in terms of export control, is the Act on Foreign Trade with
Military Materiel,21 which limits trade in military material to entities having a legitimate place of
business in the Czech Republic and having the required license from the Czech government.22
Defence and Security-Related Exclusions from the Public Procurement Act. The Czech
Republic transposes the exemption based on Article 296, which is permitted under Article 10 of
2004/18/EC, in terms of an option not to apply the APP in cases that the Contracting Authority
treats as covered under Article 296.23 Therefore, a Contracting Authority24 “shall not be
obligated to award public contracts under” the APP25 when the subject matter is declared to be
secret; the publication of tender or other information “could endanger protection of classified
information;”26 or involves contracts that are accompanied by special security measures, under
separate legal regulations; or when the protection of essential security interests of the State so
requires;27 or the contract has is for the production or purchase of armaments, arms systems,
ammunition or procurement of other war material necessary to ensure defence and security of the
State.28
Procurement Personnel. The Deputy Minister for Armaments in the Ministry of Defence has
an Armaments Department that makes most of the equipment procurement for the armed
17
APP, Art. 18(1c), which transposes the Article 296 exemption of Art. 10 2004/18/EC. Such equipment and
material is listed at Ministry of Defence Directive No. 274/2006, 1 July 2006.
18
See Part III to this Assessment at §2
19
See Part III to this Assessment at §3. The Code of Conduct is a voluntary regime that requires its subscribers to
notify the EDA of defence procurement (published on EDA Electronic Bulletin Board), except research and
collaborative efforts, valued at over €1M, and which satisfies the criteria for Article 296 exemption.
20
See Part III to this Assessment at §3.
21
Act No. 38/1994 Coll.
22
The requirements for a license are, inter alia, that the non-Czech capital in the company be less than 50% and the
officers of the company be citizens of, and reside in, an EU Member State.
23
APP, §18
24
Often called a “Contracting Entity” in the English language version of APP.
25
APP, §18(1)
26
APP, §18(1)(a)
27
APP, §18(1)(b)
28
APP, §18(1)(c). The list of such war material is set out in separate regulations.
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forces.29, although technically other bodies legally can procure things within the MoD (including
the). The main procurement body has lawyers and contracts specialists, engineering and
technical expertise, and financial managers who often operate in ad hoc project teams. The
Deputy Minister for Armaments oversees most defence procurement, but the higher profile
procurements might be under the First Deputy Minister.30 The Defence Ministry in the Czech
Republic has accepted commitments towards open competitive tendering and a more open
European defence market by committing to the EU.
Procurement Procedures. The procedures of the Czech Republic for procurement, whether
conducted under the APP to satisfy non-defence requirements, or to procure military items, are
those of the European Union under 2004/18/EC.31 These procedures are open tendering, where
all otherwise qualified vendors can tender;32 the restricted procedure, where invited vendors
provide preliminary submissions and are then are selected to tender;33 negotiated procedures
(with publication34 and without publication35 of a contract notice), where vendors who have
provided preliminary submissions are invited to enter into negotiations and eventually to tender;
competitive dialogue, which is reserved for complex cases where the procurement solution is not
clear and is in fact negotiated;36 and less formal procedures for low value purchases.37 In
practice for defence contracting claimed to be exempt under Article 296 TEC, the APP’s
negotiated procedure, with and without prior notice, are the most frequently employed
procedures.
Selected Features of Czech Contracting
● Evaluation Criteria. The APP establishes the two basic EU criteria for contract award,
either the lowest price tender,38 or the economic advantageousness of the tender.39 The Contract
Authority selects the criteria based on the complexity of the requirement,40 except in the case of
the competitive dialogue, which is limited to the economic advantageous tender.41 In fact, the
most economically advantageous tender would be the criteria in most defence contracts. In using
the economic advantageous criteria, the APP requires the Contracting Authority to establish a
29
Some military organizations conduct their own procurement, such as the military police, the intelligence service,
Military Support Command and a procurement organization that supports operations.
30
This was the case with the fast jet acquisition and the Steyr fleet.
31
The basic EU contracting processes are described more fully at Part III, §2 to this Assessment.
APP, §21(1)(b), §22 and §27
33
APP §21(1)(b) and §28
34
APP §21(1)(c), §22 and §29
35
APP §21(d), §23 and §34
36
APP §21(e), §24, and §§35-37
37
APP §21(f), §25 and §38
38
78(1)(b)
39
APP, §78(1)(a). Described elsewhere in the APP, and in the English language versions of other nations, as “the
most economically advantageous.”
40
APP, §78(3)
41
APP, §78(2)
32
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“partial evaluation criteria.”42 This “partial” (i.e., the non-price) criteria is to linked to the
required performance of the contract, and may include quality, technical merit of performance,
aesthetical and functional characteristics, environmental characteristics, operational costs, costeffectiveness, after-sale service and technical assistance, and delivery period or period of
completion. In using the most economically advantageous tender, the Contracting Authority is
required to assign the criteria factors “relative weightings expressed in percentages to the
individual partial evaluation criteria.” The relative weightings may be the same for each
criterion,43 or they may vary as needed. If the Contracting Authority is not able to establish
relative weightings, it must indicate the evaluation criteria in the descending order of
importance.44 Of course, the criteria and the weightings have to be clearly explained in the
applicable contracting documents, i.e., in the call for competition or in the tender documentation,
etc.45
● Contracting Arrangements. The APP’s procurement solutions and approaches include,
in addition to the basic contract, the EU’s framework agreements, where the Government and
vendors agree on basic terms and conditions for a purchase, but there is no contract until the
Contracting Authority places an order with the framework vendor;46 dynamic purchasing
systems (electronic commerce);47 the use of electronic auctions to conclude price competition;48
and the use of options.49
● Types of Procurement Subjects and Thresholds. Types of procurement subjects are
classified as supplies,50 services,51 or works,52 and the APP provides guidance for classifying
contracts that have aspects of more than one type.53 The application of the APP varies
depending on the subject matter of the procurement and the application of a threshold to the
estimated value of the contract, and the APP gives detailed guidance on estimating the value for
procurements of each basic type (supplies, services and works).54 At low thresholds the
formalities are relaxed and permit the Contracting Authorities to use so-called simplified
procedures.55
42
APP, §78(4). This language “partial,” refers to the technical, or non-price, aspects of the tender. The other part
is price.
43
APP, §78(5)
44
APP, §78(7)
45
APP, §78(6)
46
APP, §11 and §§ 89-92
47
APP, §3
48
APP §17(c), and §96 and §97
49
APP ibid
50
APP, §8
51
APP, §10
52
APP, §9
53
APP, §5 and §47
54
APP, §§12-16
55
APP, 38 and 25
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● Standard Documentation. The APP provides detailed rules for the content of tendering
documents;56 the use and content of technical specifications;57 and the times for phases of a
procurement.58
● Contractor Qualification and Selection. The APP establishes basic qualifications for
contractors,59 and they include professional certifications60 and financial resources.61 The APP
establishes the manner and time limits for vendors to demonstrate their qualifications, 62 and
provides guidance on evaluating qualifications.63 It also imposes an obligation on tenderers and
contractors to report any changes in their qualification status.64 Also, the APP covers the topic of
pre-qualified contractors65 as well as those “black-listed.”66 The criteria and method of down
selects are covered in the APA,67 as well as detailed instructions on the use of evaluation
committees.68
● Remedies. Any vendor that believes it has suffered, or will suffer, harm or prejudice as a
result of the Contracting Authority’s action, may lodge its complaint with 15 days. The
complaint is to be submitted to the Contracting Authority, which has 10 days to render its
decision. An appeal beyond the Contracting Authority may be lodged with the Office for the
Protection of Competition, which processes the appeal under the Czech Republic’s Act on
Administrative Proceedings.69 Appeals to the OPC require a fee.70 The fee is reasonable, and
acts as a check against frivolous and malicious appeals.71
Logistical Support
The Czech Republic is aware of developments in logistics such as Integrated Logistics Support,
but this is an area of defence activity where Cold War thought has not much evolved and modern
management techniques slow to intrude.
56
APP, §44. APP §49 envisions pre-tender site inspections by prospective tenderers
APP, §45 and §46
58
APP, §39 and §40
59
APP, §50 and §53
60
APP, §54 and §56
61
APP, §55
62
APP, §51 and §52
63
APP, §59 and §60
64
APP, §58
65
APP, §§133-142
66
APP, §144
67
APP, §§61 and 66
68
The APP governs the use of tender evaluation committees in detail from the their composition and the authorities
who can appoint members, the conduct of their sessions and their handling of tenders (APP, §75 and 76,79); and
their reports and recommendations APP, §§71-73, and §80 and §81
69
Act No. 500/2004
70
The fee is 1% of the offered price (or least at least 50,000 Koruna/€1,851, with a maximum of 2M
Koruna/€79.4M
71
Observation of a US lawyer with clients in the Czech Republic and Czech Republic market.
57
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Traditionally the armed forces and state-owned enterprises maintain and repair the equipment in
service with the armed forces, using parts supplied by the contractor when necessary. This
remains the predominant practice today, with some prominent exceptions. Most notably the
Czech Republic has leased its fleet of Gripen fighters from Saab, a Swedish firm that does
extensive work within the Czech Republic. Notions of performance-based logistics and its UK
equivalent, contracting for availability, are not reflected in Czech practice and the general
Western tendency towards increased out-sourcing, contracting with the private sector for more
support tasks has not advanced in the face of protection for state-owned facilities and enterprises.
As in Poland, there are few signs, certainly in public, of the collection and monitoring of
performance indicators in logistics. The Cold War ideal was that there should be large stocks
and more complicated thinking about inventory management, churn rates, equipment availability
rates, periods out of service and so on has not yet caught on.
Much of this will come under pressure as the Czech Republic moves away from predominantly
supporting equipment from the former Soviet Union. When this was acquired, the Czech armed
forces were provided with the intellectual property needed to repair and even modify the
equipment. This may not happen with Western equipment and the cost of spares will also be
higher.
From Kit to Capability
The Czech Republic formally endorses integrated project teams and effective teamwork to
ensure the coordination of financial, military, logistical and industrial considerations from
requirements specification through to the in-service phase.72 In practice, however, it does not
use any formal structure such as the UK Defence Lines of Development to support decisions and
capability generation and one interviewee recognised that, in the case of one acquisition, the
need for appropriate training was overlooked. There is a procedure under which the armed
forces declare full operational capability once all necessary elements have been provided, but
there is some suspicion that this can sometimes occur as political message rather than as a real
achievement. Formal responsibility for integrating equipment into the armed forces lies with the
Operations command of the Czech Army.
Defence Industry
Despite the significant cost to the taxpayer, the government is clear about its wish to support its
domestic industries with appropriate defence capabilities through its procurement choices 73.
Czech defence industry, which was extensive during Communist times, still includes three stateowned military enterprises. One deals with ground equipment and has the capability to repair the
Czech arsenal of former Soviet vehicles. Under the 14 billion Czech kroner purchase of 97
Pandur eight-wheeled armoured fighting vehicles from Stehr, this organisation is receiving
significant technology and is assembling the last 80 of the vehicles. The Czech perception was
that the rival bidder for this contract, Patria, was not in such a good position to offer offsets as it
72
73
Deputy Minister of Defence for Armaments Jan Koriva, Defence Management Journal, Issue 48
Deputy Minister of Defence for Armaments Jan Koriva, Defence Management Journal, Issue 48
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had already made extensive commitments as part of a sale to Poland. The other two enterprises
deal with avionics and R&T.
Since 2004 the Czech Republic has had a law that obliges the purchase of defence products only
from companies that have at least 51% Czech ownership and are based in the Czech Republic.
This clearly gives great advantages to firms with these qualifications, many of which are stateowned. It obliges foreign companies to bid through local partners, effectively agents, or to set up
a special local firm. The government has feared that Western defence companies would buy up
Czech industry and this legislation effectively prevents such a development. However this law
also enables the government to arrange a deal with a local supplier which then goes off to find an
international partner.
Czech procurement officials recognise the disadvantages of this law, not least in the
opportunities it opens for corruption and the award of contracts to companies not under
competitive pressures. They defend it as enabling procurement to be undertaken in contracts
under Czech law, with which they are familiar. However, since the companies concerned lack
significant financial resources, it is hard to see how the MoD could secure significant redress in
the event of contract non-performance.
Some Czech officials recognise two major procurements as having been driven by industrial
needs and, from a defence perspective, having generated poor value. The first was the choice to
undertake an extensive upgrade of the T.72, using much international technology, at a time when
the government was moving to focus on deployable forces. There was a significant development
cost with this project but only 35 tanks were eventually upgraded rather than the 200-plus first
envisaged. The second was the purchase of 72 L.159 trainer-combat aircraft for the benefit of
Aerovod. The MoD operates only half of these.
With the right incentives, management and Western input, Czech defence industry has real
prospects: the country has an engineering and technical tradition and its car industry has seen the
Skoda brand image completely transformed in the past 15 years. However, the Czech market is
so limited that a wide-ranging industry is probably not feasible. Expertise in particular niches,
including CBRN protection, could emerge as the goal as the government appreciates that the
long term protection of current capabilities will be unacceptably expensive in financial and
military terms. The crunch time will be when the Russian equipment currently supported by
Czech industry finally runs out of serviceable life.
Summary Remarks
Of the former Warsaw Pact members of NATO and the EU, the Czech Republic has the most
advanced and richest economy, yet as a small country it has little expectation of national
influence outside its immediate environment. It therefore may feel little incentive to make more
than a modest contribution to EU and NATO military capability. On the other hand, it has proud
and ambitious armed forces which would like to be viewed as capable and willing.
It operates an implicit rather than formal acquisition system. Acquisition still conjures up the
image only of procurement rather than a more holistic picture to include processes to define and
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prioritise requirements on a capability basis, assess affordability on a whole-life basis before any
final decisions are taken, and take full account of the other elements that need to be added to
equipment before a usable military capability can be said to be present.
Like other central European states in this study, the significant effort still needed to maximise the
chance of minimising corruption should not be overlooked.74 The strengthening of acquisition
organisation, regulation and processes is just one element in the change programme in the Czech
Republic, with its armed forces personnel development and management system and its
infrastructure also needing strengthening through reform.
74
The Czech Republic is in the process of procuring the construction and operation of up to three nuclear power
plants, primarily to export the energy - very definitely a strategic acquisition. It is using its version of the European
Union’s Utility Directive, 2004/17/EC, and it may conduct the procurement as a competitive dialogue. In reporting
on this project, and noting the q questioned reputation that the Czech government has for competitive contracting,
the International Herald Tribune quotes the Czech project manager as saying that it will be done “above board, and
not ‘business as usual.’” Yet immediately thereafter, and as an example of Czech contracting culture, the manager is
quoted as saying that although EU rules prevent requiring local labor, a contractor who proposed to use local
workers would be “received favorably by the public.” Czech Nuclear Plant Contracts Proceed, The International
Herald Tribune, September 2, 2010, p. 14.
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Chapter 4
The Federal Republic of Germany
Introduction
Germany is a good example of a country’s defence acquisition arrangements being linked to its
historical experiences and wider political system. In particular, a determination to avoid the
power relationships of the Nazi era prompted the creation in Germany of a system for defence
procurement that gives day-to-day and even high-level control to civilians who are outside the
military chain of command. These civilians in particular staff the procurement body, the BWB.
German history also helps to explain why the legislature, especially the Bundestag lower house,
has a bigger role in principle in defence acquisition matters than is common in Western
European countries. The key elements of the acquisition system were established once Germany
was allowed to re-establish its armed forces from 1955, and the system was designed with allied
states, especially the US, having a strong voice.
Guidance from Defence Policy
From 1955 to the end of the Cold War, (the Federal Republic of) Germany chose to focus its
military efforts on the defence of its territory against the possibility of incursion or invasion by
Warsaw Pact forces, using concepts, plans and command structures directed by NATO. The
defence of Germany was supplemented by large US, British and other foreign forces stationed
within the country and German defence policy was essentially to support NATO efforts.
Germany was seen as the most likely target of possible Soviet aggression and there was little
thought given to the use of German forces outside German territory. In addition, Article 87a of
Germany’s Basic Law (constitution) said that the Federation shall establish Armed Forces for the
purposes of “defence,” and this was often interpreted to mean that German forces could not be
used outside Germany.
The end of the Cold War brought a number of changes, of which the disappearance of the threat
from the Warsaw Pact was only the most obvious. In addition, from the Treaty of Maastricht in
1991 the European Union states sought to generate a Common Foreign and Security Policy
(CFSP) and then a European Security and Defence Policy (ESDP). While many members of the
public and political elites in Germany were often sceptical as to what armed forces could achieve
in many situations, there was never any suggestion even from Germany that such European
policies should avoid the use of military forces except for self-defence on EU territory. If
military missions were to be undertaken in the name of the EU, it was almost inconceivable that
Germany would always be excused such duties.
The Iraq invasion of Kuwait in 1990 and the subsequent Western campaign to liberate the
country brought a specific challenge. Turkey claimed that the plans and activities of the US-led
coalition meant that an Iraqi threat to Turkey was conceivable, and it asked for help. The
argument was put to Germany that it had a NATO obligation to defend the territory of a fellow
NATO member and in 1991 Germany despatched Alphajet fighters to help defend Turkish
airspace. Germany thus used its forces outside its own territory. The following years saw
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German involvement in a number of military missions in the Balkans and Somalia, facilitated by
a judgement of the constitutional court in 1994 that Germany could undertake international
military actions with the consent of the Bundestag.
By the beginning of the 21st century, Germany developed a clear policy framework, and the 2003
Defence Policy Directives specified that German forces could be used for international peacekeeping and peace-making missions, under international law and with parliamentary approval. It
was accepted that, for small missions with no danger to life, permission could be granted
retrospectively and, for less intense missions, it would suffice for parliament not to object within
seven days. Unilateral German action outside its borders was not envisaged or allowed.
Germany did not find it easy to accept that its troops might use force other than in self-defence,
but the White Paper in 2006 spoke of conflict prevention and crisis management missions1
German forces began to be re-organised and the 2006 Defence White Paper confirmed that
Germany would have three tier forces: “Response forces,” of which about 35,000 would be
professional and so could be sent overseas; “Stabilisation forces” of around 70,000, that could be
sent on less militarily demanding missions, and “support” forces that would not be equipped or
trained for overseas activities. For a number of reasons, including a reluctance to have wholly
professional armed forces, Germany did not abandon conscription but only about 55,000 out of
255,000 troops were to be conscripts.
The 2006 White Paper provided some direction for force development and capability acquisition.
Response forces had priority as far as equipment was concerned, and there was particular
emphasis on force protection.
Priority is being given to those areas in which the life and limb of all Bundeswehr
personnel must be protected, where there are justified requirements arising from
ongoing operations, or where legal obligations have to be met.2
However, Germany is interested to maintain a capability for high-intensity, net-work enabled
warfare. This (rather than deployability) seems to be the driving force behind the Response
forces3. German policy is clear that response forces are the priority for “state-of-the-art,”
networked technology while the stabilisation forces are to have “modern equipment” sufficient
for their missions and to enable them to “interact with the Response forces.”4
It is nonetheless striking that much of German defence effort is devoted to forces that could not
be deployed overseas. No German Government has yet wished to introduce a wholly
professional army although conscripts have little utility in force projection. Some think that
Germany’s force structure reflects a route to supporting German defence industrial interests,
most obviously in the land and naval areas where German industry has had solid export success.
1
Ministry of Defence White Paper, Berlin, 2006, p.56
Defence White Paper 2006, p,85
3
See interview with Army Chief of Staff Lt Gen Hans-Otto Budd in Jane’s International Defence Review, July
2006
4
Defence White Paper, 2006, p.85
2
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Finally, it may be that, despite the transformation of Europe to the West and the East, there is an
almost subconscious preference for the maintenance of a sturdy skeleton for territorial self
defence against conventional attack if political circumstances should change. However, in mid2010 the abolition of conscription was clearly on the agenda as a potential cost-saving measure.
A significant element in German foreign and security policy has been enthusiasm in principle for
operating at the European level and pushing forward the processes of European integration. The
construction of Europe is associated with the ensured absence of any return to nineteenth century
patterns of international politics and with the containment of German economic and (potential)
military strength within a wider framework. Thus Germany has a pre-disposition to support
initiatives for European defence cooperation, in the equipment area and elsewhere. However it is
also convinced of the value of NATO and of the US involvement in European security.
Germany is an enthusiastic NATO member.
German enthusiasm for European construction and NATO is reflected in its extensive
participation in international projects, which account for about 60% of its equipment
procurement expenditure. Its major collaborative project with the US is the Medium Range
Extended Air Defence System (MEADS) while it takes an important part in a large number of
projects with European states, including Eurofighter, the A400M , the Tiger helicopter and the
Boxer armoured vehicle.
The armaments dimension of German defence policy has at least three key elements which
appear to be followed.
The first is that Germany should have a strong defence industry. The 2006 Defence White Paper
recognised that defence industrial re-structuring is increasingly needed at the European level and
argues that the Government will work for consolidation among German firms so as best to
position them when cross-borders mergers are arranged. It observes that “only nations with a
strong defence industry have the appropriate clout in alliance decisions,” and that Germany
needs indigenous defence industrial capability “in order to co-shape the European integration
process in the armaments sector.” “The Federal Government will do its utmost ... to preserve a
balanced mix of defence technology, including its high technology areas, in Germany. National
consolidation, such as is taking place in the ship-building industry, is preparing Germany’s
defence technology enterprises to suitably position themselves for the restructuring process in
Europe.” Germany has since gone on to sign the EU directive to liberalise much defence-related
trade in Europe and has endorsed the European Defence Agency Code of Conduct, but the White
Paper spelled out that “the unfair competition and barriers still existing in the European defence
market should be removed prior to the creation of legally binding instruments [re a European
market]. This includes in particular the harmonisation of export conditions and the reduction of
subsidies and government-held shares in defence companies.”5 The German Government
refused to allow Thales to buy BAES’ 49% share of STN-Atlas in 2005, not wishing to see this
German asset fall into French hands. EADS was allowed to buy the shares. Tellingly the
Defence Procurement State Secretary Peter Eickenboom told Defense News in 2006 that “in
order to establish competitive system companies ... we prefer national solutions over mergers
5
Defence White Paper 2006
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with foreign companies.”6 In 2010 Germany has an internationally competitive naval
shipbuilding industry (surface ships and submarines) and a strong armoured vehicles structure
led by Krauss-Maffei-Wegmann.
While the German government undoubtedly looks favourably on German businesses, it also
expects them to deliver according to the contract. It is no easy customer, as was demonstrated
when it halted deliveries of Tiger helicopters because of a wiring problem. In the quoted words
of a government official, “as long as they don’t give us helicopters in the right state, they won’t
get any money.”7
The second policy element is that, from the earliest stages of a project, German authorities
should look for international partners to share the costs and risks. Reflecting this policy,
Germany has a higher share of its equipment spend (about 60%) devoted to collaborative
projects than either the UK or France.
The third policy point is the German authorities are only to specify requirements that can be met
using existing proven technologies so that the development technical risks are restricted to the
integration of parts, the design and production engineering. The US GAO has successfully
pressed for the DoD to accept similar guidance but the individual US services appear reluctant to
take it on board. Germany however, has produced submarines, frigates, and a number of
armoured vehicles that have been widely exported, reflecting their balance of affordability and
capability.
The Role of the Legislature
The Bundestag in Germany has in principle a significant voice in defence acquisition, not least
because contracts with a value over E25 million must be approved by the Bundestag. The
Parliament must approve every contract (which can cover one or more phases of a project).
Thus, for Eurofighter, the legislature approved the development phase and then each individual
production tranche. The process of securing approval is taken very seriously by the
Government/BWB staff and there are occasionally difficulties. In practice, however, a subgroup of the Appropriations Committee must deal with most of the scrutiny tasks and it has but a
small staff. Clearly there are hundreds of contracts and the legislature has to be very selective in
giving its attention. Only the largest or most sensitive projects are examined in any depth and it
is rare for the Bundestag to turn down a proposal from the Ministry of Defence.
Unlike in the US Congress, once the legislature has approved a project, there is no annual revisiting of the issue, unless there are significant time delays and cost escalation. The legislature
and its committees have the power to investigate the progress of any project in which they
choose to take an interest, but the German parliament audit body, which is the equivalent of the
US GAO and the UK National Audit Office, does not undertake an annual review of major
defence projects. Such reviews are a key aspect of defence oversight in the UK, the US and
Australia, among others, but they have not been adopted (or seen as needed) in Germany.
6
7
Interview published in Defense News 20 November 2006
“Germany halts Tiger procurement,” Jane’s Defence Weekly, 2 June 2010
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The German parliamentary audit body, the Bundesrechnungshof, does have extensive powers
and defence authorities do not relish its involvement in their business: the parliamentary audit
body is widely associated with investigations to allocate blame, rather than studies that generate
insight and positive criticism to promote process or organisational improvements. However a
survey of the Bundesrechnungshof website indicates virtually no references to defence in the
past two years,8 and it is much less involved in defence than either the National Audit Office in
the UK or the Government Accountability Office in the US.
Requirements
While policy provides guidance as to the tasks and functions of the German armed forces
(Bundeswehr), responsibility for specifying the equipment requirements that support the
execution of those tasks lies in 2010 with the Bundeswehr Chief of Staff, who uses multistakeholder groups called Capability Analysis Integrated Working Groups (IAGFAs) to generate
the detail. This reflects a high level wish to move responsibility for requirements generation and
prioritisation away from the single services. The chief IAGFA stakeholders are defined in the
established Customer Product Management documentation as representatives of the Bundeswehr
Chief of Staff, the relevant service chief of staff, the Director of Defence Administration, the
Director General of Armaments, the IT Director and, in an advisory role, the MoD budget
director. These groups identify relevant capability gaps, examine possible ways of filling them
using existing assets and skills, and finally set a requirement. They may have contact with
industry but “must ensure that the customer remains impartial as required by contracting law.” 9.
Clearly, Germany addresses requirements initially from a capability perspective, considering
fundamentally what the armed forces need to be able to do, and so, like the UK and others, seeks
to avoid thinking just of the replacement of an ageing system with something newer but similar.
A German version of requirements engineering is used, with the IAGFA developing the System
Capability Requirement which leads to a Final Functional Requirement.
Conceptually five key areas of capability are recognised: command and control, Intelligence
collection and reconnaissance, mobility, effective engagement and survivability and protection.
The importance of network enabled operations is also stressed.
In Germany, the generation of requirements is an accepted military responsibility. However the
purchase of goods and services to meet them is, in line with the German Basic Law, a civilian
task. This makes the civilians sensitive to the production of requirements which can be satisfied
8
See http://www.bundesrechnungshof.de/. There was a job advertisement for an auditor to work on defence,
Prüfer/in des gehobenen Dienstes im Prüfungsgebiet "Äußere Sicherheit: Luftwaffe, Strategische Aufklärung,
NATO, Grundsatzangelegenheiten Preisrecht" Bundesrechnungshof Bonn,
http://bundesrechnungshof.de/arbeitgeber-bundesrechnungshof/stellenangebote-1/ausschreibungstext_extern_201000006b.pdf/view?searchterm=Verteidigung. and Section 12 of remarks on ministerial performance which criticised
the MoD for the milestone payment arrangements it had made on a €74 million IT contract.
http://bundesrechnungshof.de/veroeffentlichungen/bemerkungen-jahresberichte/bem2009-weitereergebnisse.pdf/view?searchterm=Verteidigung
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by only one product. The importance of the procurement role, and the bargaining power of the
buyers, is much diminished in such a position. We were informed that in looking for UAV
capability in Afghanistan, the military were allegedly keen on the purchase of Predators, but the
procurement body insisted on looking wider for something to meet the requirement and
eventually selected a higher risk system that would take longer to deliver.
Equipment Spending, Industry and Acquisition Cycle Overview
Germany has the third largest defence budget in Europe and an established defence industry
developing land and sea systems on a national basis, as well as some missiles and electronic
equipment. It has the option in many cases to develop its own equipment and its acquisition
system is designed to accommodate this option. Like other states with a capability for arms
development, it has an established acquisition cycle, the German version having four stages:
Analysis, Risk Reduction, Introduction, and In-service. Specified activities occur in each phase,
including the generation of key documents. In cases where a solution to a requirement is already
available from an acceptable supplier, the Risk Reduction phase may be skipped.
The Analysis phase includes the generation of a requirement, identifying a gap in capability
which should and can be filled. The document generated is called the System Capability
Requirement and the IAGFA group leads on the production of this document. This document
“shall not aim at a concrete technical solution; it must permit innovative approaches.” 10 Once
the SCR has been agreed, research and technology money can be spent on advancing the project.
The Analysis phase concludes with the generation of the “Final Functional Requirement”: the
IAGFA group leads on the production of this document also, which serves as the basis for
contract(s) with industry covering the Risk Reduction phase. The Final Functional Requirement
constitutes the proposed solution to the System Requirements Requirement and by the end of the
analysis phase funding provision has been made for the project in MoD financial planning.
Again there is emphasis on not settling early on a particular product: the selected solution
“should not be contractor specific.”11
The Risk Reduction phase follows the Analysis phase if appropriate equipment is not available in
the marketplace, and the Project Manager in the procurement body, the BWB takes responsibility
for the project. By this stage the relevant single service will have appointed an In-Service
Manager to be responsible for receiving the equipment and making the preparations for its
operational capability.12 The Project Manager is directed to liaise closely with this person. The
Risk Reduction phase ends with the generation of the Approval for Realisation document which,
in broad terms, explains the need and that a satisfactory solution can be achieved at an affordable
cost. This document is formally the responsibility of the IAGFA group. This, along with other
milestones in the project, including expenditures over E25 million, must be submitted to the
MoD Executive Group for approval.
10
CPM, 4.2.3, p.19
CPM, 4.2.5, p.21
12
CPM 3.4.1, p.15
11
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By the Introduction phase, some development work may be needed, not least as equipment tests
“under realistic conditions” occur at this time. However, the basic production engineering and
tasks associated with manufacturing the product should have been completed. At the end of the
phase, initial operating capability is assured, and legal and safety factors settled. The Approval
for Service Use decision also certifies that the user is ready to accept the product and the IAGFA
group is informed. The Project Manager also writes a Final Report on the project.
The In-Service Phase begins with acceptance of the first item and ends with de-commissioning,
when the BWB takes charge of disposal arrangements. In-service phase includes all activities
associated with repair and maintenance, obsolescence and upgrades.
In brief, the German MoD has an acquisition cycle similar but not identical to that found in the
US, the UK and states that develop a significant proportion of their defence equipment.
Finance and Planning
Detailed financial planning in German defence procurement covers a five year period: the year
just past, the current year, and the three years to come. The financial year is the calendar year
and the budget preparation phase takes about 16 months. After initial budget proposals have
been collected a process of prioritisation takes place and a detailed proposal is made to the
legislature around September, i.e. to give legislators about four months prior to the start of the
new financial year for their deliberations. In its procurement proposals within the budget, the
government normally suggests a programme that includes, in British terms, a significant element
of risk. That is, if every project ran to time and expended funds accordingly, there would be an
over-spend in the area of 15-20%. However the defence authorities in the BWB know this is not
likely and that some projects move less quickly than planned. Actual expenditure is monitored
carefully, particularly on large projects.
As far as defence as a whole is concerned, there is a 15-year Bundeswehr plan, within which the
shorter-term plan obviously fits. The global financial crisis led to a Government decision to
restrict defence spending and so the Defence Ministry in 2010 must re-work its plans in the
personnel and equipment areas. It reportedly is being required to spend €8.3 billion less than
first planned in the 2011-2014 period. Cuts to air systems fleets in particular were expected13.
The German budget system involves the parliament seeing a detailed submission in the autumn
which it normally approves by the end of the calendar year, thus providing money for the
forthcoming year. This money is planned and expected to cover the cost of any military
activities in which Germany is engaged and, to date, supplemental requests to cover the
unplanned expenses of campaigns have not been used. In line with this notion that campaign
costs can be predicted, there is no special procurement system for the purchase of what in the UK
are called Urgent Operational Requirements. However, a pressing need for a particular piece of
equipment is one of the justifications for the BWB going direct to a preferred supplier without
holding a competition.
13
“A Change in the Air,” Jane’s Defence Weekly (JDW); “Bundeswehr Faces Drastic Personnel Cuts’,” JDW 16
June 2010; ‘Type 209As are first casualties of Germany’s defence cutbacks,”, JDW, 30 June 2010
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Although Germany spends more on defence equipment than other European states except France
and the UK, defence is allocated only a modest share of Germany’s GDP and equipment is not
made the same priority in the defence budget as in the US, the UK, or France. For most of the
first decade of the 20th century procurement spending was only around 15% of the total. The
data in Table 1 are taken from NATO documents and show that defence spending has fallen in
real terms since 2004. Only when Germany’s defence spending is converted into dollars, which
fell in value over the period, does expenditure appear to have risen significantly. These sums
include the costs of Germany’s contribution to the campaign in Afghanistan.
German defence and equipment
expenditure
2004
2005
Defence share of GDP (at
current values)
Defence expenditure in current
values (€m)
Defence expenditure in 2000
prices (€m)
Defence expenditure in current
prices ($m)
Equipment share of defence
expenditure
Equipment expenditure
Current values
(€m)
2000 prices
(€m)
Current prices
$US m
2006
2007
2008
1.4
1.4
1.3
1.3
1.3
30610
30600
30365
31090
31921
29194
28986
28616
28765
29068
38007
38054
38092
42552
46241
14.8
14.2
15
14.6
18.1
4530.28
4345.2
4554.75
4539.14 5777.701
4320.712
4116.012
4292.4
4199.69 5261.308
5625.036
5403.668
5713.8 6212.592 8369.621
Source: NATO Defence Statistics
The limited resources available to the German military raise doubts about the feasibility of
Germany’s policy ambition to equip even its Response forces with the “state-of-the-art,” network
enabled kit that is stated in defence policy.
Procurement
The BWB is a key element in the German defence acquisition system. It is a civilian body,
based in Koblenz, which the responsibility of purchasing to meet the needs of the armed forces.
The civilian nature of the BWB reflects the preferences of its founders (and Germany’s key
allies) that there should be minimal opportunity for the German military to develop close ties
with industry. The system is established so that the military have little opportunity “to spend
money” as one BWB staffer said by way of summary.
In supporting Germany’s efforts to be an intelligent customer, the BWB also has direction of the
German government’s defence research facilities and spending. In this, it is similar to the
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Delegation Generale d’Armement (DGA) in France and unlike the UK where the Vice Chief of
the Defence Staff and the Chief Scientific Adviser are responsible for most of the UK’s R&T
spending: the most important organisation that they oversee, Defence Science & Technology
Laboratories, is not directed by the UK’s defence procurement body.
The BWB’s remit does not extend to the purchase of information systems, and a separate body,
the Federal Office for Bundeswehr Information Management and Information Technology is
responsible for this task. This latter organisation does not even report to the Armaments
directorate of the Ministry of Defence but to the Modernisation directorate. The integration of
the efforts of the BWB with its Information-focussed counterpart, with the latter being
responsible for the purchase of information systems on platforms being bought by the BWB, is
recognised as an area for attention.
Procurement takes places in the context of armaments policy matters, relating to such issues as
the place of international cooperation and collaboration, procurement approaches and guidance,
security of supply, industry policy and so on. The Ministry of Defence has an armaments
division which operates in Berlin at the central ministerial building but with most staff based in
the extensive Ministry of Defence site in Bonn. Among other things, the Bonn armaments staff
address such policy issues.
German Defence Procurement (Contracting)
German Procurement. Germany is a Member State of the European Union, and therefore its
procurement practices are consistent with the mandatory features of the European Union’s
Procurement Directives (2004/17/EC for utilities, and 2004/18/EC for all other procurement),
and Germany is in the process of transposing the EU’s 2009 Defence Directive (2009/81/EC)
into its procurement rules.14 The key laws on German public procurement, the, and more
particularly its Gesetz gegen Wettbewbsbeschrankung – “GWB”) implement the European
Union Procurement Directives, and other German procurement practices and principles on top of
surviving layers of a patchwork of German law on procurement.15
Legal Authorities in German Procurement
● Background: German Budgetary Law. German defence acquisition is grounded in what
is called a “budgetary approach” as embodied in the Budgetary Law (Haushaltrecht), and its
implementing Public Procurement Ordinance (Vergaveverordnung) and regulations
(Huashaltordung). The budgetary approach is marked by principles of “austerity, economy, and
secured procurement.”16 Procurement under a budgetary approach is low price-driven and places
maximum risk on the contractors. The system also provided little real legal protection or judicial
review for aggrieved vendors.
14
See Part 3 to this Assessment Report at §2.
Hans-Joachim Priess and Annette Mutschler-Siebert, Freshfields Brukhaus Deringer, LLP, Berlin, writing in
Public Procurement – Germany, Global Competition Review (London 2009) at p. 87.
16
Norman Muller, The Law of [German] Public Procurement.
15
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● Significant Reform in German Procurement Law. Effective 1 January 1999, Germany
enacted significant legislation affecting its public contracting laws and processes. This law, the
Act to Revise the Legal Basis for the Award of Public Procurement Contracts
(Vergaberechtsanderungsgestez17), established a place for public procurement within Germany’s
anti-trust code, the GWB.18 The Act was touted by Germany as a positive step in opening its
public procurement market to increased competition, but it was hardly voluntary on the part of
German lawmakers. It was preceded by several years of external criticisms of German public
procurement, to include judgments by the European Court of Justice that the German system did
not conform to EU principles, and complaints by the European Union and the United States19
that Germany violated the General Agreement on Tariffs and Trade and accorded unfair
preference to German firms.20 Beginning in 1993, Germany attempted to address these
complaints by a series of changes referred to as the Budgetary Law Solution (haushaltsrechtliche
Losung), which enacted measures, the most important of which was the Federal Code on
Budgetary Principles (Haushaltsgrundsatzegesetz). However this “solution” was rejected by the
European Court of Justice in 1995 as insufficient - primarily because it still provided no real
legal protection to contractors.21 This ECJ decision effectively ended the budgetary law solution
and led to the legal changes that became effective in January 1999. 22 As one writer observed,
those developments, and subsequent changes to the laws, can be said to have transformed the
former “procurement system” of Germany into one that is characterized by “procurement
laws.”23
● The Current Legal Environment of German Procurement. Despite changes in the law,
which, if effective, would transform German public procurement to a point where, as one cynic
remarked, “the efficient [i.e., low price] public purchase of goods and services is not the main
objective of public procurement anymore,”24 the budgetary approach is still a major influence in
German procurement, and it is characterized by the buyer’s frugality and the corresponding need
for low prices in order for vendors to secure an award.25 Therefore, Germany’s public
procurement today reflects a dual approach based on the German budgetary law and a gradual
assimilation of the European Union’s rules for public procurement.
17
Vergaberechtsanderungsgestez, 26.8.1998 (BGBI. Ip.2512)
Gestez gegen Wettbewerbsbeschranjungen in der Fassung der Neubekanntmachung vom 2.9.1998, BGBI.I S
2546
19
The United States Government was particularly agitated by what it viewed as the unfair treatment accorded to
General Electric and Westinghouse in their unsuccessful attempts to secure contracts with the German Government.
See A. Koch, German Public Procurement – Between Tradition and Europeanization, Leiden University, 2005, p. 8
at fn. 30
20
W.K. Wilburn and I. Reichling, Germany Adopts a New Procurement Code, International Construction Law
Review, [2000] I.C.L.R. 130.
21
European Court of Justice decision, Commission v. Germany, 11/08/1995-C-433/93, Rec. 1995, I-2303
22
See A. Koch, German Public Procurement – Between Tradition and Europeanization, Leiden University (2005),
p. 7.
23
Lamm, Ley, Weckmuller, Handbook on the Contracting Rules for the Award of Public Supplies, Taking into
Account the European Procurement Directives, International Construction Law Review [2000] I.C.L.R 132.
24
A. Koch, German Procurement – Between Tradition and Europeanization, Leiden University (2005), at p.8.
25
A. Koch, German Procurement – Between Tradition and Europeanization, Leiden University (2005), at p. 4.
18
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Competition in German Defence Procurement – A Concern. Competition in Germany is
effected primarily through the Act Against Restraints of Competition (Das Gesetz gegen
Wettbewerbsbeschrankungen, GWB), which applies at a threshold that would be satisfied in
most defence purchases. In practice however, Germany’s commitment to open competition, at
least in defence contracting, is still suspect.
In contrast to some other western European countries examined, there is no
apparent emerging pattern in Germany of seeking to subject any of its major
systems, even on a European basis, to international competition….In policy and
practice, however, the German procurement agency, the Bundesamt fur
Wherteknik und Beschaffung (BWB) still tends to make the bulk of its awards on
a sole source or directed competitive basis to national suppliers or to European
consortia for European cooperative programs. According to market participants
interviewed, Germany habitually invokes Article 296 EC Treaty in procuring a
wide array of products, not all of them strictly defence-related. Thus, unlike other
Western European countries we reviewed, there is no indication that Germany has
adopted any significant shifts in its procurement policy towards the greater use of
competition on major programs or other better buying habits. By all indications,
the status quo prevails.26
Whether the 2009 EU Defence Directive will result in an opening of the German defence market
remains to be seen.
The Conduct of German Defence Procurement
● The BWB. Germany’s defence procurement is conducted by a centralized, civiliancontrolled organization within the Ministry of Defence, which itself is independent of the armed
forces, but which has jurisdiction over, inter alia, procurement. 27 The Ministry of Defence has
budget, legal, and acquisition staffs that play roles in defining requirements and capabilities; in
formulating the budgetary requests; and in the conduct and administration of defence acquisition.
The functions of major defence acquisition are affected primarily by the Federal Office of
Technology and Procurement (Bundesamt fur Wehrtechnick and Beschaffung), the “BWB.” The
BWB accomplishes major and strategic-level defence acquisition of three types: major defence
systems (e.g., the Leopard main battle tank, which is an example of multinational cooperation);
the accompanying maintenance, repair, and other logistic-related contracts for major weapon
systems; and military research and engineering contracts. Its approximately 250 headquarters’
billets (220 civil and 30 military) are organized into an Executive Management Staff, a Project
Directorate and four Project Divisions (land, land support, air, and naval), three Service
Divisions, and several Agencies. The Executive Management staff includes an Internal Audit
staff with audit responsibility over the full spectrum of BWB procurement. The components of
the Service Divisions perform a variety of functions, to include legal support and financial
26
J. P. Bialos, C.E. Fisher, and S.L. Koehl, Fortresses & Icebergs, The Evolution of the Transatlantic Defense
Market and the Implications for U.S. National Security Policy, (Washington D.C.: Center for Transatlantic
Relations, 2009), Vol II at p. 356 and p. 379. The legal reasons that limit competition are national security,
specialized or unique capabilities or access to intellectual property, and industrial base reasons, Bialos at p. 379.
27
German Constitution, GG Article 87b
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control, the later of which includes both defence budget preparation for the consideration of the
legislature and the oversight of the approved defence budget by the BWB. The EconomicalTechnical Service Division provides accounting, pricing, and auditing support for the BWB in
the negotiation and pricing of contracts. The BWB has several satellite Agencies, seven of
which are weapons system-specific technical testing/proving grounds and three are military
research centers. It is about as close to a “one-stop-shop” for major defence acquisition as we
found.
● The German Defence Acquisition Workforce. As stated above, acquisition of major
defence items is accomplished at the BWB, which also provides the contracting personnel that
accompany deployed German forces.28 As to the acquisition workforce at the strategic level, i.e.,
the BWB, it enjoys the same high levels of position, status, and professional development and
training as other BWB staff. The result appears to be an acquisition workforce that is marked by
expertise in their specialties, organizational longevity, and job satisfaction. We did find that, like
many nations, Germany has concerns over retirements and the resultant shortages in experienced
acquisition personnel. As to the military personnel involved in acquisition, while the German
military rotates assignments as a matter of professional development, advances in rank, and the
need to diversify experience within career fields, the Assessment’s impression is that the military
officers who work in defence acquisition do so without prejudice to promotion advancement.
Fundamental Principles of German Procurement. The main principles are the equal
treatment of vendors;29 transparency of procurement;30 and fair competition.31 The general
criteria for contract award is the most advantageous tender (i.e., quality and price).32
German Procurement Methods. Procurement can be commenced by a “call for competition,”
which in effect tests the market and assesses industry interest and the level of competition.
While German defence contracts would typically be awarded to the “most economically
advantageous tender” on the basis of quality and price, in practice, price is a predominant award
factor, and the officials we interviewed were very clear that the policy is to place maximum risk
on the contractors. As to the procurement procedures, Germany employs the standard methods
of the European Union,33 i.e., open,34 restricted (closed),35 negotiated procedures,36 and even the
somewhat new “competitive dialogue,”37 and framework agreements.38
28
Contracting to meet the daily logistical requirements of the military installations located in Germany is
accomplished by procurement personnel located at, and under the supervision of, the local military commander
29
GWB §97(2); §2 No.2 VOB/A; and §2 No.2, VOL/A
30
GWB §97(1); and §30 VOB/A and VOL/A
31
GWB §97(1); §2 No.1 VOB/A and VOL/A
32
GWB §97(5)
33
See Appendix 2 to this Assessment
34
GWB §101(2)
35
GWB §101(3)
36
GWB §101(4). It has been observed that the German procurement procedures were relatively unaffected by (but
consistent with) the EU Procurement Directives, A. Koch at p. 12 citing Georg Roebling, Das Vergaberecht im
Wandel der Zeit – eine Einfuhrung, Jure 2000 435 at 457. Yet, Kotch cites W. Frotscher in Wirschafttverassungs –
und Wirstschaftsverwaltungsrecht (4th ed., Munchen 2004) at ¶46, for the proposition that “German public
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The Pricing of Contracts – A Significant Feature of German Acquisition. A notable feature
of German procurement is the effort paid to the “pricing” of contracts (i.e., determining the price
reasonableness of a contract). Germany devotes substantial legal and regulatory attention, and
human resources and expertise, to the pricing of its contracts. A true efficiency that Germany
enjoys in this regard is that its pricing support is done by the BWB’s Economical- Technical
Service Division’s Service Branch for Price Audits and Cost Competence Center, which supports
the BWB Projects Divisions and Technical Centers in price analysis and negotiations. This
centralized staffing presents a uniform approach and concentrates its expertise. The highlights of
German “pricing” are summarized below. The central legal authority for this effort is “Price
Law” and its implementing authorities.39
General Principles of German Public Procurement Regarding Price. The price laws do not
allow Contracting Authorities to request or negotiate prices in contradiction of the law.40 The
German Government’s first preference is for purchases for which there are “market prices.” 41 If
the procurement does not lend itself to market prices, fixed prices are the next preference, and
they are negotiated.42 The last preference is for ceiling prices, which are variable-priced and are
reserved for target price contracts and cost-reimbursement contracts. Under its Preistreppe (the
Pocket Price Waterfall), Germany views procurement on a scale from “nearness to market” to
“remoteness from market.” While the basic principle of the German system is that its
procurement is to be as close to the market price as possible, that is seldom the case with defence
articles such as weapons systems.
Market Prices. A “market price” is basically one where there is already competition for
commercial – type items, or the competition emerges in the context of a procurement of items for
Government requirements, with account for the Government’s required product modifications,
volume, and delivery schedule. Germany recognizes several scenarios for establishing a market
price. The purest market prices are the ones that emerge when the requirement can be satisfied
by basically the same product, solution, or labor mix, and the vendors are comparably situated.43
procurement is said to be fundamentally based on European secondary law.” (i.e., the EU Procurement Directives),
Kotch at p. 6 and fn 17.
37
Wettbewerblicher Dialog, see GWB §101(5)
38
Rahmenvereinbarungen, see the Vergabeverorddnung at VgV §18
39
The main regulations for our purposes are the Regulations Concerning Contracts for Supplies and Services (Die
Verdingungsordnung fur Leistungen, “VOL”) and Regulations on Tenders for Public Works (Die Vergabe und
Vertragsordnung fur Bauleistungen, “VOB”). The VOB and VOL contain the specific rules of the procurement
process, and there are several supplementary authorities, “Public Procurement Directives.” Regulation PR No.
30/53, is the key regulation for pricing, along with its Annex, the Guidelines for Pricing on the Basis of Cost
(Leitatze fur die Preismittlung aufgrund von Selbstkosten, “LSP”)
40
VO PR 30/53, §1(3). This means, for example, in some procurements, e.g., for commercial goods for which
there are market prices, the Contracting Authority could not negotiate for lower prices, VO PR 30/53, §4(1).
41
VO PR 30/53, §1(1)
42
VO PR 30/53, §1(2) and §6
43
These are called “original market prices,” VO PR 30/53, §4(1). Original market prices based on supply and
demand in a competitive environment where the vendors are essentially similarly situated are called “Objective
Prices,” while the term “Subjective Prices” is used for prices where the market may offer more of a variety of
supplies and solutions to satisfy the Government’s requirements (e.g., an automobile to satisfy a requirement for a
civilian-type sedan). A “constitutive market price,” VO PR 30/53, 4(1), is one established through a competition.
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However, a market price can be deduced from an existing (i.e., non-government) market price,44
or established with modifications that account for Government-unique requirements.45
“Cost Price” Contracts. The distinctly non-commercial nature of some procurement is
recognized by Germany in its use of the “cost contract.” These contracts are permitted when
market prices cannot be determined, or where there is a shortage of or legal limit on
competition.46 The cost computations are established through an assessment of technical and
commercial risks. When cost prices are employed the standard is “reasonable” costs, 47 and the
Guidelines for Pricing on the Basis of Cost, or LSP,48contains the basic calculation formulas
which take into account things such as manhours/quantities, evaluation techniques, and cost
categories. The LSP is structured to reflect the basic features of commercial internal accounting
system, and reflects basic cost reimbursement principles, such as the requirement that all costs be
reasonable according to the nature of the work and normal commercial practices. 49 The LSP
establishes costs from cost categories, cost centers (pools), and unit costs.50 The LSP also
recognizes variables such as developmental costs,51 interest,52 taxes, and individualized risks.53
Costs are based on the value of the supplies and services provided under the contract. 54 Only
costs that are reasonably incurred in the course or business can be taken into account for
pricing,55 and a “cost price” will consist of the total allowable cost, in accordance with PR 30/53,
and fee in accordance with LSP ¶51 and ¶52.56 Costs can be estimated based on time, e.g.,
forward costing is based on estimates of predetermined costs, and historical costing is based on
cost experience; or on method, e.g., on the cost of processing or the cost of job orders (e.g., of
individual orders or single units).57 As to profit, the so-called “Bonn Formula” in the LSP is
used to calculate a defence contractor’s profit. The key factor is the type of effort (e.g.,
maintenance, procurements, research and development). Profits typically range between 5% and
9% of the estimated costs.
The three types of cost contracts in the German system
Fixed Cost Price Contracts.58 In this type of contract, the pricing is established either at the
outset or it becomes fixed before the conclusion of the contract performance based on a forward
44
Called a “derived market price.” VO PR 30/53, §4(2)
Called “modified market prices,” which take into account standard quantity discounts and special discounts for
large government orders, VO PR 30/53, §4(3) and §4(4)
46
VO PR 30/53, §5
47
VO PR 30/53, §5(1)
48
Leitsatze fur die Preisermittling aufgrund von Selbstkosten, LSP, ¶¶1-50
49
LSP ¶4
50
LSP ¶2
51
LSP ¶27 and ¶28
52
LSP ¶¶ 43-46
53
LSP ¶¶47-50
54
LSP ¶4(1)
55
LSP ¶4(2)
56
LSP ¶4(3)
57
LSP ¶5
58
VO PR 30/53, §6(1) and (2)
45
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pricing analysis of the Contractor’s cost experience. For example, a repeated procurement, e.g.,
a second production run or spare parts, usually carries less risk, and the price can be determined
by the contractor’s previous cost experience. The computation is based on the estimated costs to
be incurred (planned costs), which takes into account the quantities ordered, estimates of orders,
and the current price values which are to ordered, anticipated demand , and the current prices.
Tentative or Target Price Contracts.59 If there are technical or commercial risks that
cannot be reasonably defined or quantified at the outset, a tentative or target price contract is
employed. The target price is a preliminary price that will be converted into either a fixed cost
price or a cost reimbursement price. In all cases, however, a ceiling price is established which
cannot be exceeded. The conversion calculation is the key to target pricing. The conversion of
target prices into fixed cost prices is to be accomplished as soon as possible when there is
adequate data upon which to conduct the calculations. For example, after a benchmark in
performance (e.g., 10%-30% performance) from which actual costs experience can be used to
reliably estimate the value of the remaining work. If the price cannot be reasonably converted by
the end of performance, the contract is treated as a cost reimbursement contract.
Cost Reimbursement Contracts.60 These contracts are used if the technical and commercial
risks cannot be reasonably estimated at the outset, and no other pricing formula is appropriate.
Research and development contracts are excellent candidates for cost reimbursement contracts.
These contracts have a ceiling based on estimates, and payment is based on the actual costs of
the supplies and services ordered – historical costing.
Of interest, German authorities can require contractors to provide evidence with how they
constructed their proposed prices; to retain such records for five years; and they may inspect
such records.61
Legal Remedies. Germany has a very structured process for addressing complaints, and its
major changes to its procurement laws were intended to address criticisms that vendors had too
little legal recourse. Now, a vendor that believes there has been a violation of the tender rules
and regulations may bring this to the attention of the contracting authorities as soon as the matter
becomes apparent in a complaint (Ruge). Assuming the matter is not resolved to the vendor’s
satisfaction, its compliant is examined by an administrative body of first instance, the
Vergabekammer. The Vergabekammer with jurisdiction over a procurement is contained in the
tender notice and the Vergabekammer permits oral hearings to supplement the written complaint.
It is to render a decision within five weeks after the record closes. Its decision can be appealed
to a court of second instance, the Beschwerdegericht.
BWB Project Teams Make-Up and Focus
The BWB is organised on both a project and a functional or matrix basis, not on grounds of
speed and efficiency, but to minimise the chances for abuse and to ensure that all decisions are
59
VO PR 30/53, §6(3)
VO PR 30/53, §7
61
VO PR 30/53, §9
60
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approved by at least two people (‘the four eyes’ principle). It is also set up on what could be
viewed as a programme (bundles of projects) basis with a hierarchy of authority above the
individual project. However, there does not appear to be any explicit embrace of programme
management as it is envisaged in the UK with authorities consciously flexing resources among
projects and with the government providing formal guidance as to how programme management
should work.
The BWB has four high level groups dealing with land combat, land support, air systems and
naval systems. Each of these has a number of programme areas, so that, for instance, the Air
Project Division comprises three project groups, Aircraft, Helicopters and UAV/aerospace,
rescue and protection. Individual projects, with their project leaders, sit within the division. All
missiles, however, (including air-to-air and ship-to-ship) are handled within the “Land Combat”
area, which is similar to the UK “Complex Weapons” approach. An outline of the BWB
organisation can be found (in English) on its website62.
There has been a political desire in Germany for one person to be responsible and accountable
for the delivery of a project, and in principle the Germans followed the UK practice under the
Smart Procurement Initiative of appointing a Project Team leader. However, giving such a
person total authority would mean violating the four eyes principle and so in Germany the
legal/contracts and price staff on the project team come from a separate division (Project service
branch: Economics and Legal Affairs) and are not in the project managers’ chain of command.
Here is a case of a compromise in the governance domain: responsibility and accountability
would suggest a project team under one source of direction. The desire to minimise the
possibilities for the abuse of power means that decisions must be endorsed by more than one
person or group.
In terms of procurement policy, Germany has a clear written, legally-based preference for
competitive tendering. However, under German procurement law, there are a whole series of
reasons why this route may not be followed in practice. These appear to include the availability
of a unique possible supplier, contracts following on from R&D work, the particular intellectual
property rights of some companies, a follow-up to an existing order, including the supply of
spare parts, exceptional urgency, a need for secrecy, inadequate requirement definition, a need
for “special creative talents,” cost, the failure of a previous competitive tender effort, and the
decree of a federal minister (for lesser value contracts).63
The BWB has about 10,000 staff, most of whom work in its test and research centres on 11
locations around Germany. There is also a BWB office in Washington DC to liaise with the US
Government. Procurement teams are controlled by three groups of professionally qualified
people, engineers (who must be either Diplomat Ing), economists with accounting expertise
(Diplomats Kaufman) and lawyers. The Project divisions are dominated by engineers, and the
Service Division T hosts the price experts and the legal/contracts staff as separate groups. Some,
BWB staff spend time in the Armaments section of the Ministry of Defence, indeed this
organisation has most of its staff with the BWB as their base organisation. There is a specialist
German college in Mannheim which trains new civil service recruits in German defence
62
63
http://www.bwb.org/portal/a/bwb has a link to the English language version.
Bertin Technologies Study for the European Union, 2000
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procurement law, regulation and processes. It also offers career development through a number
of short courses.
Logistical Support
Since 2000 Germany has had a separate sector of the armed forces, the SKB, with over 56000
personnel, which is responsible for logistics support at home and on operations, as well as having
other tasks such as military education and the provision of intelligence and counter-intelligence
services. This body serves the army, navy and air force. Germany has recognised the
significance of the whole supply chain for sustained capability management and seeks actively to
manage it. It also appreciates the centrality of information for the efficient and effective
management of modern equipment with regard to supply times, delivery challenges, usage rates,
component wear. In short it is seeking to bring technology management and logistics thinking
prominent in the civil commercial sector into the defence area.
The SKF works closely with the BWB, which is responsible for the purchasing of all spare parts
and also contracts for maintenance and repair services with industry on behalf of their military
clients.
With armed forces that were for many years reliant on conscripts, Germany long relied on
private industry for many maintenance and repair services, which were normally undertaken
away from military bases. With it not being envisaged that German armed forces would be sent
overseas, and with the prime concern being the deterrence and possible containment of Warsaw
Pact attack, there was no need to think about support services that could be deployed.
From the late 1990s, Germany took an interest in the outsourcing activities going on in the US,
the UK and some other Western countries. These involved the procurement of a service (such as
equipment repair) which had previously being internally generated within government, or the
procurement of a service (for example car leasing) instead of the purchase of equipment (cars).
Outsourcing, and with it military dependence on the private sector, has grown a great deal in the
US and the UK and Germany too has looked to such a technique as a source of efficient
operation.
A considerable amount of outsourcing took place in defence after 2000. Initially this was
organised through an unusual state-owned agency (GEBB) but by 2010 there were a number of
specialist companies supplying support services to the MoD in the areas of clothing, information,
systems, and white fleet vehicles. Significantly Germany has insisted that these specialist
companies have a significant degree (normally 49%) of state ownership, so that government can
have a strong influence on their behaviour. The HIL company, focused on the maintenance and
repair of land vehicles, is 49% owned by the MoD, with the remaining 51% being shared among
the partnered private companies. In France there is a tradition that logistics is a core military
responsibility and, while this does not hold in Germany, the German government is less willing
than either the US or the UK to rely on private enterprise in this area.
Germany’s warships are still maintained through a state arsenal organisation that is an element
within the BWB, making a strong contrast with the UK which abandoned its government naval
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dockyards to first company management and then company ownership in the early years of the
21st century.
From Kit to Capability
Some countries have an explicit conceptual framework regarding the component elements of
capability, such as the Australian Fundamental Inputs to Capability, the UK TEPIDOIL defence
lines of development, and the US DOTMLPF structure. Some countries also use these
frameworks as a tool to ensure that, when equipment is delivered, all other needed elements have
been generated.
In considering whether a requirement can be met using existing assets, Germany uses a model
comprising “planning categories”: organisation, personnel, armaments, operation and
infrastructure.”64 However the central responsibility for generating capability from equipment
lies with the individual services and they can use the direction provided in the CPM which
covers many other areas than those addressed in the US, UK and Australian frameworks:
Capability gaps shall be closed by means of all project elements (technical and
economic elements, command/operation, organisation, staff/training, logistics,
infrastructure measures, occupational safety, IT security, military security, traffic
safety, ergonomics, geo-information and environmental protection)65
As noted, an In-Service Manager is appointed and is responsible for making the necessary
arrangements. There is a particular challenge with regard to infrastructure, which is that the
German defence infrastructure is treated essentially as an element of the larger government
infrastructure and is handled by a government infrastructure body outside the Ministry of
Defence. Thus projects requiring additional infrastructure must rely on a non-defence body for
their needs. To make a comparison, in the UK infrastructure is largely a matter for a separate
agency (Defence Estates) with its own allocation from the defence budget, but that body is
located within the ministry’s overall organisation.
Summary Comments
Unlike the situation in the US and the UK, defence acquisition in Germany is not viewed as a
particularly problematic area and the country does not have a record of continuous (and
unsuccessful) effort to reform acquisition organisations and processes. There are periodically
debates in the media and even the legislature about whether Germany should procure a particular
system and in what number. This was the case with the Eurofighter in the mid-1990s when
Germany almost dropped out of the project. But acquisition structures and processes themselves
are little contentious with Germans within and without government seeing it as a normal area of
government competence. There has been significant change in recent years, especially giving
increased powers to the chief of the defence staff for requirements generation, building a
stronger project element in the BWB, and outsourcing more support functions. However, these
64
65
CPM, 4.1, p.17
CPM 1.3, p.5
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developments have taken place quietly, as internal MoD initiatives, without the prominence and
coverage given to acquisition reform in the US and UK.
In part this is explicable in terms of where this discussion began. As a result of the involvement
with the armed forces with the Nazi era and Germany’s experience then with the use of force, the
armed forces still do not enjoy the standing and respect in society that their US and British
equivalents enjoy. The defence sector realises that it has fewer friends in German society and
the political classes and thus seeks to go about its business quietly, drawing not too much
attention to itself. In this it has been aided by the technological and sometimes commercial
success of development projects by German industry, especially in the naval and land sectors.
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Chapter 5
The Republic of Moldova
Introduction
Significant Features of Moldovan Defence Acquisition
● Moldova has not undertaken a formal defence review and recognizes that its existing
defence policy is out of date. A new version is currently under consideration by the parliament
and defence acquisition/capability development is taking place, something of a policy and
national political vacuum.
● Given its existing conscription-based structure and limited defence funding, Moldova has
no money available for equipment investments, has no multi-year plan, and purchases to feed
and clothe its troops, and fuel, are the priority.
● Defence procurement is done centrally, using Moldovan law for public (i.e., non-defence
item) procurement that is consistent with European Union-type procedures,1 for Ministry of
Defence purchases of non-military supplies and services. Military items are obtained for the
most part through country-to-country military assistance transfers (e.g., Foreign Military
Financing with the U.S. Department of Defence).
● Moldova has not begun to build the capacity for the organized through-life management of
systems or for ensuring the generation of usable capability based on equipment.
● Moldova is a European country with an advanced level of education and an increasing
number of people learning English in addition to the Russian that almost all speak. Within the
defence sector there is a clear desire for improvement and an appetite for learning.
Moldova’s Strategic Defence Environment and Defence Policy
Moldova is a former Republic of the USSR, which acquired its independence in 1991 and was
admitted to the UN in March 1992. It is a landlocked state with two neighbours, Ukraine to the
east and Romania to the west. Its predominant language is today designated as Romanian
although there has been some dispute to whether it should be called Moldovan and written in the
Cyrillic script.
The country is a new and working democracy although parties disagree on the basic strategic
alignment of the country, on whether the country should look primarily towards Russia or to
Western Europe and the US. Given the limited development of the economy, with a per capita
GDP of little over $2,000, this is an important question which obviously has an impact on the
direction of defence effort. Russia is the source of all/most of Moldova’s energy supplies and
the country has no energy resources of its own. The summer 2010 elections generated an
indecisive result with the pro-Russian Party of Communists being the biggest single party (with
1
See our discussion of the European Union defence procurement rules, Directive 2009/81/EC, 13 July 2009, at Part
3 of the Assessment Report.
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about 48% of the vote) and a coalition of pro-Europe parties seeking to form a government. A
further election was expected in August 2010.
An important aspect of Moldovan security is the problem of the Transnestrian Republic. This is
a strip of territory to the east of Moldova, on the eastern side of the Dnestr River where many
people of Russian and Ukrainian origin lived in 1990-1991 and where significant elements of the
14th Soviet Army were based. When the USSR broke up, in part because of fears that Moldova
might merge with Romania, the people of Transnestria declared themselves separate, and were
supported by Russian forces. Today the Transnestrian Republic officially has both Moldovan
and Russian ‘peacekeeping’ forces on its territory and it is unclear how the situation will evolve.
For the Moldovan Government, the Transnestrian Republic is a continuing security challenge
which is seen as a base for some organized crime operating in Moldova and with the potential to
lead to confrontation with Russia.
That said, although Moldova has many times in its history been overrun by foreign forces, there
is today no major threat from Russia, Ukraine or Romania to its remaining territory.
Soon after independence, Moldova declared itself a neutral state: although it became a member
of the Commonwealth of Independent States, it looked for real independence from Moscow.
In 2010 it lacks an up-to-date defence policy to guide the allocation of defence resources,
although a draft is currently under consideration by the parliament. (Apparently) an old version
of policy exists but the new is significantly different2. Thus the prioritization of defence
resources in Moldova is taking place in something of a policy and indeed national political
vacuum. Formally Moldova officially sees itself as a neutral state but this has not been
accompanied by the sort of serious efforts at building self-defence capability as can be found, for
instance, in Switzerland.
An important element of the Moldovan approach to defence is to maintain a conscription system,
under which about 4,000 people are conscripted a year for a 12-month period. This has massive
implications for the structure of the armed forces totaling 7,000, since a significant proportion of
the remaining 3,000 people must spend their time training new recruits. Moreover (we
understand that) all the 3,000 professional military have officer rank.
2
A 2008 report from the Geneva Centre for the Democratic Control of Armed Forces (DCAF) said the following:
‘In 2002 Moldova adopted its Military Reform Concept, which provides significant changes in the structure of
defence planning, funding, administration and organisation. The Concept encompasses political, economic and
foreign policy considerations, together with democratically-designed security strategies. However, it fails to
stipulate explicitly the new role and functions of the civilian and military components of Moldova’s security
arrangements. Moldova requires a coherent strategy to improve the current structures and institutions which are
responsible for national security’, see Cibotaru, V., 2008, 'Defence Reform in Moldova', in Defence Institution
Building: Country Profiles and Needs Assessments for Armenia, Azerbaidjan, Georgia and Moldova, eds. P. Fluri
and V. Cibotaru, Geneva Centre for the Democratic Control of Armed Forces (DCAF), Geneva, pp. 74-92.
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The Role of the Legislature in Defence Acquisition
The single chamber Moldovan legislature has considerable powers with regard to defence. In
addition to its role of legislation to establish the legal foundation of the armed forces, it does not
automatically approve the budget submitted by the government and historically has been ready to
reduce the proposed allocation for defence. It also must approve the country’s military doctrine,
international cooperation plans and commitments to undertake military operations3.
Moldovan Defence Requirements Generation
Moldova has a unified armed force with a land and an air component. It operates an annual
budget creation cycle which involves the Ministry of Defence consulting down through the
General Staff to force commanders and others to specify needs for the following year. Military
requirements thus emerge from the military structures on a bottom up basis, with eventual
endorsement of a requirement being the responsibility of the Chief of the General Staff.
Given the development of the economy and the size of the defence budget, Moldova is clearly
not well placed to evaluate modern technology for the purposes of defining attainable but
ambitious requirements.
There is also a prioritization process through a committee chaired by the Deputy Defence
Minister with the Deputy Chief of the General Staff as the vice chair. This committee includes
all the main defence stakeholders, including the heads of the land and air forces, the head of the
legal department, the head of the support command, the head of the military medicine, the head
of the Acquisition Department and so on. As in other countries, the members of this committee
tend to view proposals from the perspective of their particular profession or area of responsibility
and Moldovans recognize that defence-wide thinking is unusual. It takes its decisions on a
majority basis with the chair having the casting vote in the event of a tie.
Finance and Acquisition Planning
The planning horizon in Moldova does not extend beyond the end of the next financial year and
is basically part of the budget preparation and implementation process.
The limited defence budget, which is around 0.5% of GDP, is largely consumed by the payment
of salaries and the feeding, clothing and wider care of soldiers, with some funding available for
fuel. Financial planning is about making sure these needs will be met in the following year.
Procurement is largely about the purchase of goods to support troops daily needs (see
Procurement section below).
The budget includes the concept of capital spending, and in previous years money has been
found for infrastructure improvements, especially soldiers’ housing, but in practice parliament
has normally cut capital projects and the percentage of defence spending allocated to new
equipment, which NATO states report, is in practice zero in Moldova. Thus there is little point
in the Defence Ministry generating any kind of multi-year programme of acquisitions. Its focus,
as we were told, is on survival.
3
Article 4, Moldovan Law on the Defence, Moldovan Ministry of Defence website
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Western governments are interested in the stability and security of Moldova, and have thus been
ready to provide modest amounts of aid, including military help. Moldova’s planning must
therefore address its needs in terms of what foreign donors may be willing to provide. In
prioritizing requirements, rather than considering what the market has to offer at what price,
Moldova must consider the possibilities for external aid.
The external defence aid received in the past two years amounts to about $2 million in value in
total. It has involved particularly a field hospital and medical equipment from Germany and
communications and navigation equipment from the US.
With this pattern of defence spending and levels of external help, the prospects for Moldova
maintaining even its current modest level of military capability is low.
Moldovan Defence Procurement (Contracting)
Moldovan Defence Acquisition. Although the responsibilities of the Ministry of Defence and
General Staff are evolving, the Moldovan Law on Defence gives responsibility to the MoD for
the acquisition, manufacture and repair of weapons, military technology and other supplies.4 The
Moldovan Ministry of Defence acquisition staff, a small centralized team consisting of mostly
active or retired officers, meets the non-military procurement needs of the MoD using the
authorities of the Moldovan Public Procurement Law (PPL). Military equipment and related
support materiel (e.g., shelter infrastructure for a military field hospital) are obtained at present
by the MoD through non-procurement channels, e.g., country-to-country transactions or defence
cooperation.
The Public Procurement Law.5 Moldova’s public procurement law (PPL) is clearly based on
the EU procurement Directives.6 It applies to all government contracts, even contracts awarded
by the MoD,7 except those excluded. In this regard, contracts that are declared secret, 8 or
“contracts for the procurement of goods, works and services connected with the manufacture of
or trade in armaments, ammunition and armament sales”9 are excluded from the PPL. However,
Moldova currently has no “defence rule” for purchases that are exempt from the PPL. Therefore,
Moldova has no established rules that are exempt from the PPL.
Principles of Moldovan Public Procurement. The principles are consistent with the best
practices of public procurement, such as respect for law and regulation, the importance of ethics
and integrity;10 efficiency and economy;11 transparency, competition, and equal treatment of
vendors;12 the public good, to include offering lawful supplier preferences;13 and fostering
4
Article 4, Moldovan Law on the Defence (Moldovan Ministry of Defence website)
Law on Public Procurements, No. 96-XVI, 13 April 2007 (“PPL”)
6
See Part II to this Assessment on the European Union’s 2009 Defence Directive
7
PPL, Art. 5(1)
8
PPL, Art. 4e
9
PPL, Art. 4k
10
PPL, Art. 6j, Art. 65a, and Art. 67(1)
11
PPL, Art. 6a and Art. 65b
12
PPL, Art. 6b, 6b, 6h, and Art. 67(6)
5
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international trade and honoring of international obligations. 14 Moldovan procurement is
required to be consonant with the national budget.15 It also requires that the Contracting
Authority establish reasonable terms for contracts, with due regard for the complexity of the
requirement, and taking into account things such as subcontracting, supply, and shipment,16 and
that all terms be included in the contract documents.17 Contractors may be required to indicate
which parts of the contract they intend to subcontract, but subcontracting does not release the
prime contractor from its obligations.18 After contract award, contracts cannot be improperly
modified in terms of scope.19 The value of contracts cannot be fragmented in order to avoid the
applicable contracting procedure, or amended to take the contract beyond the previous value
threshold.20
Participants in the Moldovan Contracting Process
● The “Agency.” The PPL is the legislative authority for a supervisory organization for
public procurement, the Agency for Provisioning of Tangible Resources, Public Procurements
and Humanitarian Aid.21 The Agency’s roles include the coordination, assessment, and
monitoring of public procurement, to include reporting to the Government on procurement;22
public information and notification;23 drafting procurement rules and standard terms; 24 advising
Contracting Authorities on specific contracts, and procurement in general, to include training on
procurement;25 exercising oversight and authority on contractor qualifications and eligibility;26
coordination with external acquisition sources and authorities;27 and dispute resolution.28
Contracting Authorities are required to report the contracts they award, in the detail specified in
the PPL, to the Agency.29
● The “Contracting Authority.”30 The focal point for public contracting is the
“Contracting Authority.” This can be a designated individual or a collection of government
13
PPL, Art. 6d, 6e, 6i, Art. 65c, and Art. 66. Under Article 66, preferences can be given not only to specified
sources, but also to contractors who benefit certain groups (e.g., employing under-employed individuals)
14
PPL, Art. 6f and Art. 7(2)(which gives precedence to an international legal obligation over domestic law)
15
PPL, Art. 65(1)
16
PPL, Art. 65(5)
17
PPL, Art. 65(3)
18
PPL, Art. 68
19
PPL, Art. 65(4) and Art. 69(2) and (3)
20
PPL, Art. 69
21
PPL, Art. 8, which refers to the organization as “the Agency” (quotes and italics in the original).
22
PPL, Art. 9(1)b, 9(1)f, 9(1)g, 9(1)m
23
PPL, Art. 9(1)I and 9(1)l
24
PPL, Art. 9(1)a, 9(1)d and e, 9(1)h
25
PPL, Art. 9(1)k
26
PPL, Art. 9(1)c, 9(1), 9(1)n
27
PPL, Art. 9(1)o, 9(1)p
28
PPL, Art. 9(1)j
29
PPL, Art. 70. Contracts must also be reported to the State Treasury as a condition of legal efficacy, PPL Art.
65(8)
30
PPL, Arts. 12 - 14
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agencies,31 and agencies can combine contracting authority to serve the needs of more than one
organization.32 The duties of the Contracting Authority are set out in detail in the PPL, and they
range from long term contract planning,33 and ensuring competition,34 to the tendering process,
contract award, and administration.35
● Working Groups. The Contracting Authority can convene “Working Groups,”36 and
these are the teams that conduct the actual procurement.37 The Working Group includes subject
matter experts,38 and the PPL sets standards to ensure that members of the Working Group are
free from conflicts of interests.39
● The Contractors (“Suppliers”).40 The PPL does not discriminate against foreign
sources,41 but does permit set-asides for domestic sources, provided that it is in accordance with
law and adequately reported and explained.42 Contractors may form associations for contract
opportunities without regard to a particular business form, but they can, upon selection for
contract award, be required to assume a particular legal entity if the Contracting Authority
determines that it is needed to properly execute the contract.43 A contractor’s ability and
qualifications are determined by consideration of several factors, including the contractor’s
management, technical, and financial capabilities;44 its legal standing and compliance record, to
include the absence of sanctions in the last three years;45 and the contractor’s affiliations.46 The
Contracting Authority may inquire about these matters in the tendering process, 47 and other
Government sources can provide information.48 The failure to provide satisfactory information
allows the Contracting Authority to disqualify a bidder.49 The Agency maintains a list of prequalified suppliers,50 and it also operates the list of disqualified sources.51
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
PPL, Art. 12
PPL, Art. 12(3)
PPL, Art. 13(1)b
PPL, Art. 13(1)f
PPL, Art. 13(1)c-e, g-k
PPL, Art. 13(1)a
PPL, Art. 14(1)
PPL, Art. 14(1) and (2)
PPL, Art. 14(3) and (4)
PPL, Arts. 15 - 18
PPL, Art. 15(1) – (3) and (5), and Art. 16(5)(regarding the qualifications of contractors)
PPL, Art. 15(1)
PPL, Art. 15(5)
PPL, Art. 16(1)a
PPL, Art. 16(1)b - e
PPL, Art. 16(1)f
PPL, Art. 16(1), (3), and (7)
PPL, Art. 16(8)
PPL, Art. 16(4) and (5)
PPL, Art. 9(1)c and Art. 17
PPL, Art. 9(1)c and Art. 18. Disqualifications are typically for three years, PPL, Art. 18(1).
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Features of Moldovan Procurement
● Transparency of Procurement Actions. The PPL addresses the manner and content of
the public notice of anticipated52 and actual contracting opportunities,53 as well as contract
awards.54 The Contracting Authority is obligated to explain the procurement procedures55 and to
provide unsuccessful bidders information about the award decision.56 Once an actual contracting
opportunity is released (Moldova instituted electronic communications for tendering notices)57
the amount of time contractors have to submit their tenders after the release of the notice of
opportunity is permitted to vary according to the value and complexity of the procurement. 58
● Specifications. Specifications are to be written so as to make it possible for sources to
submit fully compliant proposals,59 and must address quality and matters such as testing and
acceptance procedures, security, delivery and transportation, etc.60 There is a preference for
technical specifications,61 using international or recognized standards where available,62 except
where performance or operational specifications are either the most efficient approach, or
functionality is of primary importance.63 Brand name or specific solutions are to be avoided,
except where necessary, in which case equivalent characteristics are to be indicated.64
Moldovan Contracting Procedures. The PPL recognizes several methods for effecting a
contract.65 They are all very similar to the procedures of the European Union, and are
summarized below.
● The Open Tender.66 In Open Tendering, all qualified sources are permitted to submit a
tender.67 The Contracting Authority effects notice of the contracting opportunity in accordance
with the detailed publication and notice content requirements of the PPL.68 The PPL contains
rather detailed rules for the Contracting Authority’s conduct of an open tender. In selecting the
winning bid, lowest price need not be the sole factor, in fact, for supplies, the criteria is an
unspecified mixture of price and technical factors,69 while as to works and services, price must
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
PPL, Art. 19
PPL, Art. 20
PPL, Art. 21
PPL, Art. 22(1)a
PPL, Art. 22(1)b and (2)-(4)
PPL, Arts. 23 - 24
PPL, Art. 26
PPL, Art. 27(1)
PPL, Art. 27(2)
PPL, Art. 27(3)a
PPL, Art. 27(3)c and (5)
PPL, Art. 27(3)b
PPL, Art. 27(4)
PPL, Art. 33
PPL, Arts. 34-35
PPL, Art. 34
PPL, Art. 34(2) and Arts. 35 -39
PPL, Art. 45a
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be respectively at least 80% or 40% of the criteria.70 Also of note, and this seems to apply in all
cases of Moldova’s contracting, the Contracting Authority’s selection of a bid, tender, or
proposal results in a communication back to the tenderer that in effect allows the tenderer to
consummate the contract with an acceptance.71 The Open Tender is the procedure to be used,
unless circumstances satisfy the PPL’s conditions for the use of another procedure.72
● Negotiated Procedures.73 This procedure follows the open procedure as far as allowing
all interested parties to request to participate. The Contracting Authority selects those with
whom it will negotiate and permit to tender. This intermediate process is called “pre-selection,”
or “short-listing.”74 The procedure is to be used where the risks associated with the subject
matter do not lend themselves to accurate pricing;75 the nature of the requirement makes drafting
precise specifications difficult,76 or the subject matter is for non-profit research.77 The process
permits the parties to negotiate out the details of the requirements and the specific contract
terms.78
● Competitive Dialogue.79 This is a two-step process that commences with an open
opportunity to participate.80 Candidates are selected from those that submit technical proposals
(not price) that seem capable of satisfying the requirement.81 This procedure is reserved for
satisfying “particularly complex” (emphasis in the original) requirements.82 Candidates chosen
for their proposed approach are then engaged in further technical discussions and price
negotiations.83
● Framework Agreements.84 These are agreements with one or more vendors, using the
regular applicable procurement procedure, under which the parties agree to the key terms and
conditions. Thereafter, the Government may, but is not required, to place an order under the
agreement.85
70
PPL, Art. 45b and c. Of note, the Contracting Authority must allow a bidder to explain an abnormally price,
PPL, Art. 46.
71
PPL, Art. 47
72
PPL, Art. 33(2)
73
PPL, Art. 52
74
PPL, Art. 49
75
PPL, Art. 52b
76
PPL, Art. 52c
77
PPL, Art. 52d
78
PPL, Art. 52(2)
79
PPL, Art. 51
80
PPL, Art. 51(1)
81
PPL, Art. 51(3)
82
PPL, Art. 51(2). This emphasized language is exactly the same in the EU Defence Directive, which contains as
detailed treatment of the process. See Appendix 2 to this Assessment.
83
Art. 51(3) and (4)
84
PPL, Art. 50
85
While not specified in the PPL, the Moldovan framework agreement, like its EU counterpart, is not a contract
and does not require the Government to place an order with the framework contractor.
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● Sole Source Contracts.86 The PPL specifies an extensive list of conditions under which
award can be made under circumstances of limited or no competition. These include the
competition of a process that began with other procedures,87 urgency,88 unique technical
capability or rights,89 or the procurement is only for research or trials.90 Single source
procurements are also recognized for a situation where, in the case of supplies, an other-thanfollow on contract would require unnecessarily expensive changes due to incompatibility, etc.91
Of note, the PPL allows the Government to take advantage of bargain supply opportunities, such
as in the case of companies that are “winding down,” or are in receivership.92 The PPL also
recognizes this authority for cases where a modification to the contract is unexpected and is a
mater of “absolute necessity” in order to complete a project.93 The PPL also provides that, if
notice is so given at the outset, contracts for works of a type that might have repetitive
applications may be made without competition to the winner of the initial contract.94
● Quotes for Low Value Contracts.95 The PPL allows for less formal procedures for
purchases under a certain threshold.96 The Assessment team received an extensive briefing on
the MOD’s use of these procedures, which it uses to satisfy many of the MoD requirements.
● The Dynamic Procurement System97 and Electronic Auctions.98 The “dynamic
procurement system” is an open electronic process for engaging vendors of commercial items.
Vendor submissions are in terms of price and assurances of non-price compliance. Electronic
auctions, as the term implies, are real-time successive auctions of usually commercial items.
● Procurements Using the Universal Commodity Exchange.99 This procurement
authority is addressed in the PPL in one sentence, which authorizes its use under regulations to
be issued by the Government (Reg. No. 29). The Assessment team received a detailed briefing
on the process, which the Moldovan MOD uses to satisfy its acquisition requirements for fuel
and lubricants and also commercial vehicles. The Exchange acts as a broker, which provides the
market with the buyer’s requirements and maximum price, and then the vendors who are
admitted to the exchange compete in terms of price.
Appeals and Remedies.100 A party that believes a Contracting Authority has caused it actual or
prospective harm may appeal.101 Appeals are filed with the Agency.102 If the appeal pertains to
86
PPL, Art. 53
PPL, Art. 53(1)a
88
PPL, Art. 53(1)b
89
PPL, Art. 53(1)c
90
PPL, Art. 53(2)a
91
PPL, Art. 53(2)b
92
PPL, Art.. 53(2)d
93
PPL, Art. 53(3)a
94
PPL, Art. 53(5)b
95
PPL, Art. 54
96
PPL, Art. 54(1) sets the threshold at under MDL 200,000 for goods and services, and MDL 1M for works.
97
PPL, Art. 55
98
PPL, Art. 56
99
PPL, Art. 58
100
PPL, Arts. 71-75
87
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the content of the tender documents, the appeal must be lodged before tenders are due; otherwise
within 10 calendar days from the time the party becomes aware of the grounds for appeal. 103 An
untimely appeal will not be considered.104 The content of the appeal is specified in the PPL, and
it must provide the details of the claim, together with any supporting documents.105 The Agency
may, upon the request of the supplier or on its own initiative, suspend the procurement for the
duration of the appeal process.106 The Agency will attempt to settle a dispute, but if it cannot, it
must issue its decision within 20 days.107 The Agency gives notice of the appeal to other
suppliers who are participating in the procurement, and they can protect their interests if they
choose.108 Infringements of the PPL by the Contracting Authorities may result in civil,
administrative, or penal actions,109 and suppliers who are not satisfied with the Agency’s
decision have a right to judicial appeal.110
Logistical Support
The Logistics Command of the armed forces is responsible for the support of people and
equipment, and operates a system of depots and transport. The armed forces are responsible for
a legacy of former Soviet equipment in a significant volume and disposal of old material is a
significant challenge. The country looks for opportunities for external sales of such material.
There have as yet been no accidents with regard to stored ammunition missiles.
Such repair as occurs takes place by units and organizations within the armed forces and funding
problems mean outsourcing is rarely considered. We understand that, although the country has
an airbase and owns some Mig.29s, they are not actively operated because the support funds are
not available. The readiness state of the aircraft is not known.
Facilities maintenance and most catering are undertaken using conscripts (although the officers
club dining area does use an outside contractor).
The impression gained is that Moldova essentially lives with the equipment and the large stocks
of ammunition and spares that it inherited from Soviet times.
Industrial considerations
101
PPL, Art. 71(1)
PPL, Art. 72(1)
103
PPL, Art. 72(1). Whether “days” are working days or calendar days is frequently a subject of dispute. Moldova
takes the mystery out of this by wisely specifying that it is calendar days.
104
PPL, Art. 72(2) and Art. 73(4)a.
105
PPL, Art. 72(3). An appeal that does not comply with these requirements will not be considered, Art. 73(4)b,
but the Agency is to give the supplier notice of the defects, and allow it two days to correct the deficiency, Art.
73(5).
106
PPL, Art. 74(1) and (2)
107
PPL, Art. 72(5) and (6), and Art. 73(6)
108
PPL, Art. 73(1) and (3)
109
Art. 75
110
Art. 74(10)
102
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The country has little industry of any sort and relies primarily on agriculture. It has no defence
industry to speak of and little awareness of the types of offset arrangements that other countries
often seek to negotiate.
From Kit to Capability
Insofar as the country has received new equipment, it has come from external aid and the donor
has also provided training in its use. For some time Moldova provided a small unit for post-2003
operations in Afghanistan and its troops received extra equipment and training from the US.
Similarly the US has provided training in the use of communications equipment that it has
provided more recently.
The country does not (appear to) operate any formal decision tool such as the TEPIDOIL
framework in the UK, nor has it any formal mechanism for declaring new equipment ready for
operational use.
Across defence, there seems to be few or no explicit performance indicators in use.
Summary Comments
For sustainable and coherent defence preparations it needs to finalize an agreed defence policy,
but it will not be easy to agree on a document that can secure support across the political
spectrum.
It has made a significant effort to build a formal, effective and efficient system for the
purchasing of the things it must buy (food, clothing and fuel in particular), as the Procurement
section above makes clear.
Its overall defence management arrangements are not directed towards specific objectives or a
drive for constant improvement, but towards minimizing the damage arising from the limitations
on funding.
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Chapter 6
Poland
Introduction
Poland’s defence acquisition system is coloured in a number of ways by international
considerations, including its membership in NATO and the European Union, by its wider
defence and security context, and by its own sense of significance in the international
community. It is a system in a state of evolution which needs further improvement as experience
and confidence is built. It is also a system in which concerns about corruption can slow
decision-making and make difficult the effective cooperation that is often needed among the
military customer, procurement staffs and industry.
Defence Policy and Strategy
Poland has generated a hierarchy of security and defence policy documents that provide
important guidance as to the capabilities which the country’s armed forces should seek to
develop. These documents make clear that Poland should be ready to be a contributor to global
peace and security: working with allies and friendly countries, it should be ready and able to
contribute to international missions. It must also be ready to implement a comprehensive, multiagency approach. Poland sees its security as based on its membership in both NATO (which it
joined in 1997) and the EU (which it joined in 2004). Poland since 1990 has seen US support as
vital to its security and has agreed to accommodate important elements of the US planned missile
defence system. It remains to be seen whether Poland feels it receives adequate recognition and
reward from this contribution to US security, and there are some indications that some in Poland
feel their help is sometimes taken for granted by the US.1 In general, however, Poland seems
likely to provide what it takes to keep a credible US guarantee.
In its Vision of the Polish Armed Forces 2030 document (May 2008), the MoND’s Office of
Transformation lays out how the global security situation is expected to evolve and the
contribution Poland will make: regular armed forces possessing complex weapons systems and
appropriate logistics base will be less frequent enemy of the Polish army’ (p.11). Much of the
document envisages a world much like today’s with counter-insurgency, post-conflict
stabilisation and disaster relief operations being prominent, and with the US continuing to enjoy
‘political, technological, economic and military primacy’ (Para 3). There is the categorical
statement that “the basic form of activity of the Polish Armed Forces within next 20-25 years
will be participation in military intervention operations conducted outside the territory of the
country within the framework of crisis responses by the EU, NATO or state coalitions.”2
However, while the need for conventional defence activities on Polish territory and in the wider
Euro-Atlantic area is recognized as less probable, it is not at all excluded as a possibility. In
1
Bialos, C.E. Fisher, and S.L. Koehl, Fortresses and Icebergs, The Evolution of the Transatlantic Defense market
and the Implications for U.S. National Security Policy, (Washington, D.C.: Center for Transatlantic Relations, 2009)
Vol. II at pg 446.
2
Vision of the Polish Armed Forces 2030, ¶41
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2030 the tasks of the Polish military are to include “conducting military activities in order to
protect the territory of the country, European Union or Euro-Atlantic area in case of a direct
aggression,” and “participation in international activities aimed at the protection of mining
infrastructure and routes of transportation of energy raw materials in order to ensure continuity
of their supplies.” (para. 56)3.
In terms of individual capabilities, Poland takes seriously the possibility of attack from weapons
of mass destruction and aspires to an integrated system for detecting and warning. Troops
should also be equipped with individual and collective means of protection.4
Polish thinking also specifically recognises the need for enhanced force projection capabilities to
transport its forces overseas. In 2008 documentation it is clear that the government looked
primarily to cooperative European schemes within NATO and the EU to secure access to
increased airlift capabilities,5 but by 2009 an aspiration for the procurement of national assets to
address both air and sealift had also appeared.6
Polish policy also makes clear that the country’s forces should be technologically advanced. By
2030, “the Polish armed forces shall constitute an important element of the military and political
potential of the European and Euro-Atlantic Community. They will be modern, well-trained and
well-equipped troops able to operate in a netcentric battlefield, characterised by a high level of
flexibility and capable of conducting military operations both in their own territory and the EuroAtlantic area as well as outside it.” (Introduction). “Saturated with modern combat technique
and military equipment, they will have integrated intelligence, command, support and logistics
structures.” (para 54).
In 2009, after the Russian conflict with Georgia, the Polish MoND published its Defence
Strategy document, under the umbrella of the country’s National Security Strategy. This
emphasized local rather than global issues: “Poland’s security is primarily determined by
processes and developments occurring in our vicinity.”(para 17). This document noted the
importance of Poland’s “strategic partnership” with the US as a separate element from NATO
and EU membership, which could have implications for defence acquisition (paras 16 and 35).
On the other hand, it also emphasized the European Union and the European Defence Agency as
focal points for procurement cooperation and defence industrial consolidation (para 26).
Apart from recognition that the new world implies a Polish army with heavy armour being less
prominent and lighter more deployable infantry being needed, the policy guidance offered might
be seen as rather open-ended and, like that prevailing in the UK from 1998, not too helpful in
supporting prioritisation efforts.
Technological Expertise
3
See also Ministry of National Defence, Defence Strategy of the Republic of Poland, Warsaw 2009, paras 52-55
and paras 127-136.
4
Ministry of National Defence, Defence Strategy of the Republic of Poland, Warsaw 2009, para 92
5
Vision of the Polish Armed Forces 2030
6
“Defence Strategy” 2009, para 89.
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Like other governments, Poland needs to make provision for technological expertise so that it
can specify requirements that are feasible but challenging, given the resources available. Such
knowledge should also assist Poland to evaluate the technical content of bids and even to kick
start some indigenous defence projects. The generation of such knowledge requires funding
where the principal element is the modest money outside MoND in the science budget (m zlotys
154 in 2010) which serves defence purposes. However, Poland does spend a small amount
within defence on research and is a participant in EDA research projects which have the potential
to leverage significantly the Polish contribution. The Polish authorities are not without ambition
with regard to what they can obtain for their expenditure, but the guidance offered is perhaps too
broad to help decisions about priorities: the Defence strategy document asserts that “research and
industrial units should focus their efforts in the area of defence technologies at developing
production technologies that enhance the security of troops, providing a big deterrent effect,
permanently raising their combat potential and ensuring manoeuvrability of armed forces.” 7
However the Science and Military Education department has a list of 20 “priority areas” for
R&T, some of which like “propulsion technology” and “directed energy” are broad and
demanding in scope.8 Polish spending levels could not allow meaningful spending to be directed
at all these areas.
Poland in 2010 has a number of guidance documents in addition to those cited here and Figure 1
below summarises the extensive documentation and technical input that the Armaments Policy
Department sees as relevant guidance for requirements generation.
Figure 1: Guidance for Requirements Generation
7
8
Defence Strategy Para 28
Briefing slide from Science and Military Education department of MoND
Comparative Assessment Project 2010
Poland- Chapter 6
96
ARMAMENT POLICY DEPARTMENT
Polish Forces Goals
and Long Term
Planning
Lessons Learned
from Operations
Report on the Defence Status
of Poland
NATO Policy
Guidelines
NATO Strategic
Concept
Review of
Operational
Needs
Strategic Defence Review
Detailed Transformation and
Modernisation Directions for the
Polish Armed Forces
Military Strategy of
Poland
Evaluation of the
Polish Armed Forces
National Security Strategy of
Poland
Science
Technology
Guidelines on Defence Planning
within the Ministry of National
Defence
KIELCE, 03.09.2007
4
The Role of the Legislature in Defence Acquisition
As in other states examined here, the Polish legislature’s main roles concern the shaping and
approval of legislation dealing with defence acquisition, especially procurement (see below
under Procurement), and the approval of defence budgets on an annual basis. The legislature can
become involved in major acquisition decisions, although this is rather an exceptional
occurrence. Most notably the parliament passed a law in 2001 specifying the requirement for 16
second hand and 44 new fighter aircraft, a commitment which was later scaled down and led to
the purchase of 48 F.16s after a major international competition.
Requirements
Responsibility for the generation of requirements lies with the Chief of the General Staff, which
is a formally a joint organisation. However, it must also be recognised that the land forces
(army) are financially and politically the most important branch of the armed forces, with the air
force in second place. The navy, in the words of one Polish observer, “doesn’t really count,” and
receives less than half the funding of the air force. In the words of the Vision of the MoND for
2030: “The Land Forces will be the basic component of the Polish armed forces .... By 2030 the
Air Forces shall become one of the most important organisational structures of the Polish
army….The Polish Navy shall consist of three basic components: combat ships, air units and
coastal defence.”9
9
Vision of the Polish Armed Forces 2030, ¶68-¶70
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While Poland has formally adopted a requirements system that reflects capability-based
thinking,10 and that distinguishes functional and technical requirements, an overarching
requirement for the equipment of Poland’s military is that it should be compatible and
interoperable with that of Poland’s post-Cold war allies. This has generated a Polish drive to run
down its inventory of Warsaw Pact origin equipment and to put Western standard (and usually
western origin) equipment in its place.
In terms of a wider acquisition system that includes organisation, people, skills and behaviours,
Poland is still developing its ability to articulate operational/functional requirements and to
integrate them with technical needs. Requirements engineering skills remain under construction.
In principle the General Staff is responsible for generating an Outline Staff Target which is
explored for technical and financial feasibility by the Armaments Policy Directorate which
generates the Staff Target11.
Like the United Kingdom, Poland claims to use scenarios of military operations, Poland’s likely
role in such operations and operational analysis to generate relevant and useful requirements.
The main responsibility for generating requirements lies with the J5 section of the joint military
organization and some joint priorities have been asserted, in particular headquarters command
system (Safran-ZT) and a digital signal system (Krokus 2000) have been bought. But the
individual services have also developed their own (ambitious) lists of desired items where the
solutions in terms of type of system (if not a specific manufacturer) have been identified. The
Navy for instance, aspires to a support ship and a command ship to enable blue water operations
while the Army wants anti-aircraft artillery and anti-tank missiles12.
We were advised that Poland (like many nations) has occasional difficulty in adequately
translating operating requirements into technical requirements, and is attempting to address this
by establishing a cadre in internal resources with this expertise. For the present, this support is
often obtained from one of the several military-civilian institutes, which is also a resource for
technical support in the evaluation of technical proposals.
Poland needed much extra equipment to enable it to undertake deployed operations in Iraq and
Afghanistan. It developed its own system for fast-tracking Urgent Operational Requirements
through the acquisition cycle, which involved less scrutiny by anti-cooperation authorities13.
However it was also supplied with a large amount of equipment including body armour, tactical
radios and mine-protected vehicles by the United States either on an outright grant basis or at
special prices through the Foreign Military Financing program.
Finance and planning
10
Poland has offered a capabilities framework comprising reinforcement, reconnaissance, strike, logistical support,
command & communications support, training, air defence, engineering support, medical support, defence against
wmd, information technology and IT and data communications support, and meteorological support. Defence
Strategy 2009, ¶94
11
Briefing slides from the APD
12
Bialos et al, p.461
13
Reference to IDARM workshop in Warsaw ,2008
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98
Reflecting the drive to move from a Warsaw Pact origin to a NATO-compatible inventory,
Poland is devoting a substantial share of its defence spending to equipment, and data from the
Ministry of Defence (MoND) show capital investment as taking 22.5% of defence spending in
2009. However, defence is awarded only a modest share (1.95%) of GDP so the total sum
available for equipment is modest at less than $1 billion. This figure has to be seen alongside the
aspirations for Polish forces noted in the policy section above.
Poland has planning arrangements covering the next two, six and ten years but planning is
recognised as an area where particular improvements are needed14.
The limited size of the procurement spend means that the large projects cannot be afforded in a
small number of years and so, for the F.16 purchase, Poland took out a loan from US official
sources. This is being repaid (MZ 141.5 million in 2010) at a moderate rate.
The Acquisition Cycle
Poland has an intricate acquisition cycle with no less than six review points being earmarked,
review being the responsibility of the Armaments Council led by the Minister and his deputy.
Figure 2 below is a digest from the Armaments Policy Department of what should be involved.
The MoND appears to have developed an acquisition organizational structure similar to that of
Germany. Within the Polish defence ministry there is an Armaments Policy Department which
receives proposed requirements from the General Staff, approves their validity, develops
technical requirements from functional requirements, and considers procurement strategy before
passing the project to the Procurement Agency to carry forward.
Figure 2: The Polish Acquisition Cycle
14
Defence Strategy 2009, paras 144-147
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99
ARMAMENT POLICY DEPARTMENT
PROCESS
GS
Capability
Identification
Document
Capability
Definition
Document
AC
Capability
Identification
APD – R&D
PD – procurement
APD
Staff
System
Concepts
Staff System
Requirements
System
Requirements
Document
AC
AC
AC
Capability Prefeasibility Feasibility
Evaluation
Study
Study
Capability Definition
Process
Project
Definition
System Requirements Definition Process
Capability Definition
Equipment
design
Services
Equipment Capability
AC
AC
Gap
Analysis
AC
Design
Development
Production
In-service
Disengagement
Development
Process
Production
Process
Organisation
Process
Comparison
Process
Acquisition
KIELCE, 03.09.2007
In-Service
3
Observers indicate that the acquisition cycle may operate in a somewhat more ad hoc manner
than the acquisition cycle may indicate, with officials muddling through procurement measures
and learning as they go along. The personnel involved still lack education, training and
experience in areas including systems thinking and engineering, project and programme
management, and project leadership.
Defence Procurement
Under Communism, procurement was an intra-governmental process involving the armed forces
and state-owned industry in Poland and the rest of the Warsaw Pact. Thus Poland has had to
learn since 1990 about how to deal best with the private sector. The F.16 purchase in particular
was managed on an ad hoc manner with the Agency for Military Property acting as the
programme management agency and with the bids being evaluated by a 23-person evaluation
committee. Although a major training exercise took place prior to the establishment of specialist
procurement body and the creation of public procurement law and regulation in 2004, the
learning process is still far from complete. In 2010 Poland has a single agency, the Procurement
Department (PD) to undertake defence procurement for all the services but it is a young
organization which is still trying to build skills in areas such as project management and
leadership, risk management, commercial awareness, technology assessment and so on. Bialos
and his colleagues have observed that “each acquisition professional is managing a larger
portfolio than is practical,” and have pointed to the limited coordination among those specifying
requirements, those responsible for purchasing, Polish defence industry and the Ministry of
Finance. “Because the military has a difficult time expressing its real requirements to [civilian]
procurement officers, Requests for Procurement often do not accurately reflect the military
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needs. And given the limited communication between the industry and the military, the military
have only a vague idea regarding what industry can provide.”15
As part of its inheritance from the Communist era, Polish society and government has a
reputation for endemic corruption16 and extensive procedures to minimize the chances of
corruption in defence procurement have had to be developed. These include both Polish officials
and industrial figures committing to the Integrity Pacts promoted and arranged by the
Transparency International non-governmental organisation. There is also a significant screening
process to make sure that procurement choices are made on the basis of the criteria specified in
the tender documentation. The Anti-Corruption Office of the Ministry of Defence scrutinises all
regular procurements.
Whatever the place of competition law (see next section), there is little doubt that the outcome of
competitions in Polish acquisitions has been much influenced by the offset packages offered (see
below) and the finance arrangements available. In the case of the Gripen versus F.16
competition, the US/Lockheed Martin offered a significant offset package, three years free
support for the aircraft, and a 15-year, low interest loan deal direct from the US Treasury which
did not require Poland to make any significant repayments for eight years if necessary17.
Other capital investments in Poland have been funded by external aid, with infrastructure
improvements funded by the NATO Security Investment Programme. In 2004 Germany
effectively gave Poland 12 Mig.29s and 132 surplus Leopard 2 tanks.
Defence Procurement Processes (Contracting)
A European Union Model. Poland’s defence procurement system is governed by a confluence
of domestic laws and regulations that are clearly reflective of, and consistent with, its treaty
obligations and also its voluntary adhesion to the European Defence Agency’s Code of Conduct
and the EDA’s Code of Best Practices in the Supply Chain.18 Also, Poland’s rather extensive use
of offsets in concert with its defence procurement makes it an excellent candidate for reassessing its offset policies in light of the EDA’s Code of Conduct on Offsets.19
Legislative Authority for Defence Procurement. The Polish rules for general (i.e., nondefence) procurement are closely modeled after the European Union’s Directive 2004/18/EC.
However, the key governing authority for Polish defence procurement is “Decision 291” (“Dec.
291”) a regulation issued by the Minister of National Defence.20 Under Polish law, defence
procurement may receive separate treatment,21 and Dec. 291 implements the Minister of
15
Bialos et al., p.462
Bialos et al., pp. 446, 448, and 483ff
17
Bialos et al., p.469
18
See Part 3 to the Assessment Report for a discussion of these two EDA Codes
19
See Part 3 to the Assessment Report for a discussion of the EDA Code on Offsets.
20
Decision No. 291/MON of the Minister of National Defense, “On the Terms and Procedures for Contracting for
Armaments and Military Equipment at the Ministry of National Defense,” 23 August 2006 (MOND Official Gazette
23 August 2006).
21
Public Procurement Law Act of 29 January 2004, Art. 4,3)f) provides that the Public Procurement Law shall not
apply to “supplies and services being subject to Article 296 [now 346] of the Treaty Establishing the European
16
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Defence’s exercise of that exemptive authority.22 The goals of Dec. 291/MON are stated as fair
competition, equal treatment of economic operators, legality, and unification (i.e.,
standardization) and compatibility of Armed Forces’ armaments and military equipment.
Like all European Union nations, Poland will have to modify its national laws on defence
procurement by August 2011 to make them compliant with the mandatory features of the
European Union’s 2009 Defence Directive, 2009/81/EC.23 Whether this will reduce Poland’s
use of its defence only law (Dec. 291), and open up its defence procurement, remains to be seen,
as is the case with all EU Member States.
Procurement Procedures. Poland’s procedures reflect those of the European Union both as to
non-defence and defence procurement. They include open tendering, restricted tendering,
negotiated procedures with and without publication, and the competitive dialogue.24 Open
tendering is conducted where the requirements are clear and can be well-stated. When open
tendering is conducted, it is done under the rules of the Civil Code.25 Negotiated procedures are
typically conducted with several contractors when there is a requirement for the unification of
the arms or military equipment. The concept of “unification” is defined in the Decision, and is
basically where a standardization or continuity is needed,26 or a follow-on contract to a previous
properly-awarded contract makes the most sense.27 Poland also has authorities for single-source
procurement; the use of quotes for low value purchases; and electronic bidding in cases where
the technical qualifications are basically equal and price is the determinative factor. It also
recognizes government-to-government acquisition (specifically with the United States under
Foreign Military Sales)28 and participation in international acquisition programs, such as those
effected by NATO’s Maintenance and Supply Organization (NAMSO) and its Maintenance and
Supply Agency (NAMSA)29
Rules Regarding Contractors. The Contracting Authority sets the qualifications for
participation in the procurement process and for the receipt of a contract award, and contractors
must be clearly advised of the rules and criteria for the competition in the notice that commences
the procurement process.30 The qualifications, in general, are that the Contractor is eligible to
engage in business (e.g., meet license or other qualifications); has the necessary technical and
Community,” and Art. 4,5) adds to the exemption “contracts which are declared state secret according to the
provisions on protection of confidential information or when the basic interest of the State’s security so requires, or
the contracts declared confidential, if the basic public interest or basic state interest so requires;…”
22
Dec. 291 states that to the extent a matter is not addressed in the Decision, that the Civil Code applies, Dec. 291,
§4.8.
23
See the Assessment’s analysis of the EU Defence Directive at Part 3, of the Assessment Report.
24
The operation of these procedures is addressed in more detail in the analysis of the EU Defence Directive at Part
3, of the Assessment Report.
25
Dec. 291, §19.1,1 and Article 70 of the Civil Code.
26
Dec. 219, §21 (a) and b)
27
Dec. 291, §21(c)
28
Dec. 291, §28 and §19.1.5
29
Dec. 291, §19.1
30
Dec. 291, §11.4. The Decision makes clear that the manner in which a contractor can demonstrate compliance
must also be set out in the notice documents, §13.6
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human resources; and has adequate financial capability.31 Of note, Polish Contracting
Authorities must require the contractors to select their subcontractors and suppliers in conformity
with the EDA’s Code of Best Practices in the Supply Chain. 32 Contractors may apply for and
receive contacts jointly.33 Contracting Authorities can require reasonable amounts of
certifications of compliance, the types and nature of which are set out in the Decision.34 Of note,
Contracting Authorities are to request contractors who have submitted incomplete applications to
“rectify” the error or omission.35 This is hailed as a notable improvement to Polish procurement,
which had a negative reputation in the international legal community for summarily rejecting
proposals that were easily capable of correction.
The Implementation of Defence Planning and Budgeting through Defence Procurement. A
notable aspect of Polish defence procurement is that Dec. 291 specifically addresses the
“Initiation of [Procurement] Procedures,” and the processes and conditions under which the
defence planning and budget processes transform into the contracting process. 36 It specifies
compliance with the planning directives governing central material plans and also the budget,37
and addresses the process for proceeding with a procurement that is not reflected in the central
material plans. If the matter requiring procurement is budgeted but not specified, the
procurement must be preceded by consultation with the appropriate budget authority,38 and in
cases where the matter is not included in the central material plans, the Minister of Defence must
approve the procurement,39 in consultation with the appropriate budget authority in cases of
multi-year contracts,40 and in all cases in agreement with the appropriate military planning
staff.41 Approvals for unplanned procurements are required to be reflected in an adjustment to
the applicable planning systems.42
The Influence of the European Defence Agency in Polish Defence Acquisition. In 2005 the
EDA instituted the first of its “regimes,” the Code of Conduct for Defence Procurement. 43 This
voluntary collection of principles and practices was initiated in an attempt to modify the practice
31
Dec. 291, §11.1, 1) -3)
Dec. 291, §11.1,4)
33
Dec. 291, §12.1. For example, as a joint venture. In these cases, the contractors must demonstrate their
organizational capacity to the Contracting Authority, §12.2.
34
Dec. 291, §11.2 , §13.1, §13.2, §13.4, §13.5. §13.7 and 8
35
Dec. 291, §13.3
36
Dec 291, Ch. 3
37
Dec. 291, Ch. 13, §14.1. The Directives are 347/MON (planning) and 391/MON for budget.
38
Dec. 291, Ch. 3, §14.3
39
Dec. 291, Ch. 3, 14.2
40
Dec. 291, Ch. 3, 14.5
41
Dec. 291, Ch. 3, 15.6. This is the Head of the Strategic Planning Directorate – P5 of the General Staff.
32
42
Dec. 291, 14.7
43
See Part 3 to the Assessment Report . Commentators on international defense acquisition observe that Poland’s
embrace of the EDA Codes were prompted by its desire, especially on the part of then Minister of Defense Sikorski,
to create, and to project an image of, a more transparent procurement process. Source:Wladek Rzycki, Partner in the
law firm of Hogan & Hartson (Poland).
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of EU Members almost routinely exempting their defence procurements under the authority of
Article 296 of EU Treaty. All EU nations, except Romania, are subscribing members to the
Code of Conduct. However compliance with the Code, by its own terms, is voluntary, but
Poland – unlike the other EU nations we studied – has referenced the CoC in its Dec. 296, which
requires Polish procurement officials to “take into account” the CoC,44 and that, subject to the
types of procurement cited in the CoC, that where contracts are estimated > €1M that they be
advertised; conducted by proper authorities; and if rules are waived, that any waiver be
consistent with the CoC waiver criteria, to include a report of the waiver.45 The EDA has also
authored a voluntary Code of Best Practices in the Supply Chain,46 to which Poland has
subscribed and also acknowledged in Dec. 291.47
Definitions. The Decision begins with Definitions, of which there are 28. Those that have
counterparts in the EU are verbatim or very similar in the English version. Of note, the
Definitions posit the concept of “unification.”48 Unification is a non-exclusive concept that is
exemplified in scenarios such as selecting or continuing with a vendor or product so as to avoid
wholesale replacements of equipment or systems components that would be necessitated by
changing vendors, or additional purchases not anticipated at the time of contract award, and
which for technical or urgency reasons warrant making noncompetitively, by amendment or by
new award to the incumbent contractor. The Definitions specifically call out the European
Defence Agency’s Code of Conduct on Defence Procurement and its Code of Best Practices in
the Supply Chain.49
They also define five types of tender (partial, additional, final, equivalent and variant); an
[acceptable] modification to the purchased supply;50 and distinguish between contracts and
framework agreements.51
Procurement Rules. Contracting Authorities must abide by the Decision,52 and conduct
procurement consistent with the principles of legality, economy, purposefulness and reliability,
and equal treatment of vendors,53 and with a view towards “unification” and compatibility, and
cost reasonableness and contract administration efficiency.54 Procedures are to be conducted
consistent with the requirements of all other external and applicable laws, regulations and
priorities, to include security and budget;55 compliance, quality assurance, technical oversight,
44
Dec. 291, §4.2
Dec. 291, Ch. 2, §4.3 through 4.7. The Decision also provides specific requirements for compliance with the
EDA Code of Defence Procurement in the electronic auction process at §18.1 and §18.2.
46
See the Study’s discussion of this Code in Appendix 3
47
Dec. 291, Ch. 2, §4.2, (“taking into account”)
48
Dec. 291, Ch. 1, §2 21)
49
Dec. 291. Ch. 1, 2, 6) and 7)
50
Dec. 291, Ch. 1, 2, 9) “AME Modification”
51
Dec. 291, Ch. 1, 19) and 20)
52
Dec. 291, Ch. 2, 3.1
45
53
Dec. 291, Ch. 3, 3.2. We are advised that “purposefulness” means buying only what is needed, and in the
qualities and qualities that are required.
54
Dec. 291, Ch. 3, 3.3
55
Dec. 291, Ch. 3, 4.1, 1) and 2)
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and environmental concerns.56 The only mention of offsets in the Decision, is to “setoff
agreements.”57 As to the EDA’s Code of Conduct and its Best Practices in the Supply Chain, the
Decision implements those rules to include their applicability and nonapplicability. 58 The
Decision makes clear that, to the extent not addressed in the Guidelines, the Polish Civil Code
applies.59 The Guidelines direct how the values of procurements are to be estimated in Euros,60
and Contracting Authorities are specifically prohibited from segregating procurements so as to
fall below the otherwise applicable thresholds for regulation and compliance.61
Procurement Responsibilities and Participants (Chapter 2, 6 and 7).
● The Manager. The Guidelines place the responsibility for a procurement with a
“Manager”62 who is defined as the Contracting Authority’s director, commander, chief, or
manager.63 Eight nonexclusive duties of the Manager are set out in the Guidelines, to include the
appointment of the government personnel to participate in the procurement.64 The Guidelines
specify persons who are excluded from the procurement, which exclusion decision is the
responsibility of the Manager.65 These persons include those who seek to execute the contract or
are organizationally tied to such an entity, those who are related by family or investment to
potential contractor,66 and those who do not satisfy other eligibility criteria regarding which all
government participants must attest.67 The Guidelines set out a detailed process and schedule for
ascertaining, from both the Government personnel and the participating contractors, the
information from which the eligibility and exclusion decisions can be based.68
● The Committee. The real work of the procurement is conducted by a “Committee” whose
members are appointed by the Manager.69 The Committee is to consist of at least three
persons,70 who may be appointed to definite or indefinite terms of committee service, 71 and may
be, as needed (e.g., for purposes of technical expertise), from outside the contracting
56
Dec. 291, Ch. 3, 4.1 7), 8), and 9). We were advised that Poland, like many nations, often has more resources
available for the award process than for the Government’s post-award oversight of contractor performance.
57
Dec. 291, Ch. 3, 4.1, 13)
58
Dec. 291, Ch. 3, 4.2 through 4..7. See Appendix to this Study
59
Dec. 291, Ch. 3, 4.8.
60
Dec. 291, Ch. 3, 5.2.
61
Dec. 291, Ch. 3, 5.1. Every nation is cognizant of the temptation to break up requirements so as to avoid the
requirements and formalities that apply to larger value procurements. However, few nations actually call this out in
their procurement rules, as Poland does.
62
Dec. 291, Ch. 2, 6.1.
63
Dec. 291, Ch. 2, 2,5
64
Dec. 291, Ch. 2, 6.2, 1).
65
Dec. 291, Ch. 2, 7.3
66
Dec. 291, Ch. 2, 7.1, 1) through 5)
67
Dec. 291, Ch. 2, 7.1.1, 6) and 7.2
68
Dec. 291, Ch. 2, §8 and §9
69
Dec. 291, Ch. 2, 6.2, 1) and 10.2
Dec. 291, Ch. 2, 10.2. These are a chairperson, secretary, and members.
71
Dec. 291, Ch. 2, 10.2
70
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organization.72 The Committee is to have the necessary technical expertise needed to accomplish
its duties, and the persons providing such support may be appointed to advise the Committee or
to serve as a member of the Committee.73 The Committee is to have legal staff support, and
operates under rules set by the Manager.74 The duties of the Committee are set out in the
Guidelines in detailed non-exclusive lists,75 which cover the Committee’s duties in the several
forms of procurement (tendering, negotiation, and electronic auction), and include, as
appropriate, the preparation and release of documents, evaluations and negotiation, and
recommendations for contractor selection.
Contractor Eligibility. The Guidelines set forth basic criteria for the eligibility of contractors to
compete for contracts. They must be legally qualified in matters where eligibility is governed by
law; be technically and financially capable; and, where applicable, satisfy the subcontracting
requirements of the European Union’s Defence Acquisition Agency’s Code of Best Practices in
the Supply Chain.76 The eligibility criteria for each procurement must be set out specifically and
treat contractors equally,77 and contractors are required to certify their qualifications in a
specified format.78
Conflicts of Interest. The Decision excludes persons from participating in the contract
awarding procedures if they seek to participate in the contract implementation,79 are related by
blood, marriage, or other personal relation,80 to a competing contractor, or have a current or
former (3 years) contract or employment relationship with a contractor,81 or an investment
relationship,82 or anything that could give rise to a reasonable doubt about the person’s
impartiality,83 or a failure to satisfactorily certify regarding a conflict of interest.84 The exclusion
decision is made by the Manager.85
Polish Offset Law
Poland has one of the most demanding offset requirements that the Assessment observed, and
Polish defence companies appear to be trying to maintain their hold on offset projects since the
current practice forces foreign off-setters to direct most offset projects to existing and mostly
unreformed Polish defence companies, with the inefficient cost structure and the old Soviet-style
72
Dec. 291, Ch. 2, 10.3
Dec. 291, Ch.2, 10.5
74
Dec. 291, Ch. 2, 10.6 and 10.7, respectively
75
Dec. 291, Ch. 2, 10.8 through 10.11
76
Dec. 291. Ch. 2, 11.1
77
Dec. 291, Ch. 2, 11.4 and 11.3, respectively.
78
Dec. 291, Ch. 2, 11.2
79
Dec. 291, §7.1,1)
80
Dec. 291, §7.1,2)
81
Dec. 291, §7.1,3)
82
Dec. 291, §7.1,4)
83
Dec. 291, §7.1,5)
84
Dec. 291, §7.1,6). The form for this certification, which addresses the matters in the Decision, is a standard form
to the Decision.
85
Dec. 291, §7.3
73
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management. Either because of the European Defence Agency’s 2009 Code of Conduct on
Offsets, or for other reasons, Poland’s Ministry of Economy is preparing a draft of the revised
Offset Law. Reports indicate that issues will be hopefully addressed to make it easier to manage
the offset obligations in Poland. In any case, it does appear that the Government’s strategic
perspective in offsets does not match the EDA’s vision that offsets recede as a matter of national
defence policy and that, in the interim, that they be used to foster and support a European-wide
defence base.
To be sure, the current Offset Law needs revisions in order to bring genuine benefits to the
Polish economy and to those Polish defence companies that are capable and willing to use the
offset program as an opportunity to upgrade the production and technology base to the 21st
century. One area of offset that is viewed as in need of reform is the penalties system for nonperformance of offset obligations, with the penalties potentially exceeding 100% of the value of
such obligations. While the possibilities of penalties serve a legitimate purpose, the prospect of
severe penalties cause foreign companies with offset obligations to look for projects with the
lowest risk of non-performance and they therefore pass on offset programs of potential benefit to
Polish defence companies that are seeking to upgrade the products and technology base. In this
regard, the Government seems to have been steering offset obligations to Polish companies in
poor shape, thus picking losers instead of winners. The new Government is trying to change this
situation and also to help the new breed of efficient private companies operating in the sector.
Defence industry
As Poland moved out of the orbit of Soviet domination, it had a significant defence industry that
was oriented to serving the needs of its armed forces and those of other Warsaw Pact members 86.
It was an industry that exported significantly and had more capacity than needed for Poland’s
forces alone. It was state-owned and poorly structured to survive in a competitive environment.
Although Poland was responsible for the production of a range of systems, the USSR had limited
its capabilities in defence electronics, avionics and weapons guidance systems. This meant that
it was poorly placed to upgrade its older Soviet-origin kit without extensive help from the West
and to contribute to the netcentric capabilities that the MoND endorsed as the key element of the
future. Also, aside from its limited technological and management capabilities, it had no
experience in preparing bids.
However, for socio-economic and perhaps strategic reasons, the Polish Government did not wish
simply to abandon this industry, which it continued to see as its primary source of defence
supply87.
Reflecting these considerations, Poland has developed a defence industrial policy marked by two
perhaps contradictory features. First it has sought to move state-owned businesses into the
private sector, sometimes by selling them to Western defence firms including EADS, Textron,
Pratt & Whitney, Sikorsky and Ericsson. This has, however, proved a slow process and the bulk
of Polish defence industry remains today in state hands, most of it organised within the 15
companies of the Bumar group. Second, it introduced in 1999 and modified in 2007 an offsets
86
87
See Bialos pp.449-450
Defence Strategy 2009, para 141.
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law that requires 100% offsets on all defence contracts worth more than €5 million, and at least
50% of which must be direct defence offsets. Offsets agreements must be concluded with the
Ministry of Economy soon after contract award and cannot extend over more than 10 years.
Offset credits are awarded on the basis of a formula embedded in the offset law. Generally
the nominal value of the transaction is multiplied by a factor ranging from 0.5 to 5.0,
depending on the nature of the arrangement and its perceived value to the defence industry,
as determined by the Offset Office of the Ministry of National Economy. Most work share
arrangements [on the project itself] are given a factor of 2-4, which makes work share the
easiest and most economical way for most defence companies to meet their obligation.
Other types of offset arrangement, particularly indirect offsets, often get bogged down in
the factor to be applied.88
An unusual feature of the Offsets Law is that it obliges companies who fail to meet their offset
commitments to pay compensation, not to the value of any offsets shortfall, but to the value of
the offset commitment as a whole. The perhaps unexpected consequence of this latter regulation
has been to lead Western companies to play safe and to place work with Polish companies that
they were confident would be successfully completed. This has not required the generation of
new skills and industrial capabilities (i.e. industrial transformation) but the continuation of
existing abilities89. This in turn has made privatisation harder. Of firms that have been privatised,
especially in the aerospace sector there is evidence that they can deliver support and modification
work on western built systems.90
Logistical Support
Allocation of support functions to state-owned defence firms is an important element in the
government’s approach to protect and develop these organizations and Poland does not have any
clear commitment to the outsourcing of equipment support to the private sector.
However, there is a rather categorical statement of expectation regarding contractors deployed
on military operations (CONDO), and it is worth quoting the paragraph in full:
An essential element of the operational forces within next 20-25 years shall be
commercial, supranational paramilitary organisations which, under contracts concluded
with national authorities or international industrial corporations, shall carry out a broad
spectrum of tasks that are currently within the domain of the army. These organisations
shall protect industrial infrastructure and people, perform training activities and carry out
police tasks. Under mandate of international organisations, the above forces shall also
undertake preventive measures of a police and military nature in particularly dangerous
regions where introduction of army units shall involve level of risk unacceptable by the
international community.91
88
Bialos et al, p.479
Bialos et al, p.447
90
Bialos et al., pp.456-7
89
91
Vision of the Polish Armed Forces 2030, para 46.
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It may be that the further development of the CONDO roles is an area that Poland expects others
to lead, but the statement as a stands offers at least formal acceptance of tasks for contractors that
would provoke some controversy in the wider developed world.
From Kit to Capability
Poland recognizes that the purchase of equipment is no assurance of capability and sees the need
for future service personnel will have to be more capable: “a modern, more efficient military
equipment and weaponry based on sophisticated technology shall lead to a reduction of the army
manpower on the one hand, but on the other hand it will increase requirement that candidates to
the army service will have to fulfil in the field of knowledge, interdependence, self-discipline
and responsibility.”92. In this context however, Poland has moved only to increase the weight of
long-term volunteer professionals in its armed forces and conscription has not been abandoned.
Summary Remarks
Poland is still involved with the implementation of a highly demanding multi-dimensional major
change effort outlined in Figure 1. The challenges involved individually and collectively should
not be under-stated, and it is not surprising that there are still significant problems.
Figure 1: The change programme associated with Polish defence acquisition
Mission/roles
Pre-1990
Post-1990
Build a capability to
contribute to Warsaw Pact
offensive drives Westwards
Build a capability to contribute to
crisis management operations in the
wider world
Establish a residual capability to
defend Polish territory against
invasion or other forms of attack
Force structure
Up to 350,000 troops with a
capacity to mobilise 750,000
Less than 100,000 full-time military
personnel
Equipment
Centrality of heavy armour
The need for deployability and small
role for heavy armour
Increased role for surveillance,
communication and network-enabled
capabilities
Interoperability
92
With Russian/Warsaw Pact
equipment and forces
With NATO equipment and forces
Vision of the polish Armed Forces 2030, para 80.
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Industry
The capacity to supply other
Warsaw Pact forces
The need for reduced industrial
capacity and little opportunity for
exports without Western investment
and help
Procurement
An internal affair among
government departments
Purchasing from the private sector,
with specific offset requirements,
from the globalised defence industry,
often using competitive tendering
While it is commendable that a country should have a significant ambition and an inspirational
vision for its defence forces, Poland has perhaps generated policy documentation which lays
down unattainable and therefore less than optimum guidance, given the funding it has available
for today and the immediate future. There is always a temptation that those writing and
endorsing policy guidance will emphasise the important role that a country could/should play in
the world. When such policies are used to guide and justify defence acquisition plans,
unaffordable programmes can be the result.
Poland also faces a dilemma that faces continuous and sensitive management: its chief security
concern is that of a resurgent Russia which seeks to dominate its country. To deal with that
possibility, it needs the backing of countries in the West organised through NATO and the
European Union. Polish defence thinking still includes reference to preparations that need to be
made to address the contingency of invasion. Such concerns do not intrude much into British or
even German defence thought. In risk management the hardest hazards to address are those
which are low probability but very nigh impact. For Poland, an aggressive and capable Russia is
of even higher impact than it is for most other NATO states, and thus Poland may well wish to
see more resources devoted to the possibility than many of its allies.
Finally with Western help Poland has devised an impressive looking acquisition system, but
continues to require improvements as its relatively small and mid career age experts lack
knowledge, training and education and experience to make it work smoothly.
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Chapter 7
Ukraine
Introduction and Policy Guidance
Ukraine is a country of 46 million people that formed a large portion of southwestern Soviet
Union. Upon its independence, it absorbed the Soviet military personnel and units stationed on
its soil, with the exception of the ships based on the Black Sea, which remained in the Russian
Navy. It therefore inherited a collection of military personnel and equipment from which it had
to try to create a shaped and coherent set of armed forces. A very important early choice was to
return all the many nuclear missiles and warheads on its territory to Russia.
Since its independence, Ukraine has functioned as a working democracy, with governments
yielding power as a result of elections. Most recently in 2009, President Yushchenko was
replaced by President Yanukovich, who favored closer relations with Russia; removed Ukraine’s
aspiration to join NATO from the agenda; and signed an agreement with Russia under which
Ukraine is believed to have granted Russia a lease of the Sebastopol naval bases until 2042. This
is in return for an assurance of gas supplies at a 30% discount from market prices1.
Ukraine has a small number (approximately 400) of troops deployed on international peace
support operations, but they are integrated into wider units rather than being specified
formations. Unlike, for example, Croatia which has deployed whole units, Ukraine does feel
pressure to ensure that its deployed troops are particularly well-equipped.
The latest change of government has meant further confusion and delay regarding the completion
of a Strategic Defence Review to give direction to Ukraine’s defence activities including defence
acquisition. The SDR in September 2010 remains a work in progress.
In the absence of clear policy direction, the Ukrainian military uses scenarios to guide the
creation of training exercises, and such scenarios could of course be used to justify the overall
shape of Ukraine’s forces and defence acquisition choices. Ukraine appears to use both
conceivable threats, and a sense of basic tasks for the three armed forces, to guide its
requirements generation.
In terms of defence improvement in Ukraine, acquisition appears to be a lesser priority than the
professionalization of the armed forces. This latter reform program involves major cultural
changes in the armed forces and the creation of career non-commissioned officers and warrant
officers, groups that did not exist in the former Soviet Army but which are regarded in the UK,
for example, as the backbone of the army. As well as organizational change, a major training
and education effort is needed. This topic looms much larger and higher on the Ukrainian
defence agenda than changed organization, processes, behavior, and thinking in acquisition.
1
“Ukraine pulls back from NATO,” Jane’s Defence Weekly, 9 June 2010
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Ukraine’s army is remains heavy and organized in large units. According to The Military
Balance 2010 of the International Institute of Strategic Studies, it still has in its inventory a total
of 3988 tanks, 3028 armored fighting vehicles, and 3551 artillery pieces. 2 Although it is moving
from a regional to a national structure, with a Joint Rapid Reaction Force, Main Defence Forces,
and a Strategic Reserve (not unlike Germany), it is continuing to organize mainly on a
corps/divisional basis. Its air force is large (45,000 people). It operates 211 combat aircraft, 38
support helicopters, and 49 transport aircraft, as well as a number of ground-based air defence
systems. The management of these forces presents huge challenges, even allowing for the lower
costs in the Ukrainian economy. Basically, Ukraine seeks to operate armed forces comparable in
size to those of the UK, with extensive equipment holdings, while spending around one fiftieth
of what the UK pays. Forces of this nature would appear to be justifiable only for the deterrence
and denial of a large-scale invasion attempt.
Requirements
Ukraine works on a Ministry of Defence/General Staff system, where the former provides
political direction and oversight and the latter organizes the preparation of armed forces and the
execution of any military operation3. The General Staff, with eight main departments, is
responsible for initiating new requirements, and the J5 (Planning) section has the lead on
requirements. Many Ukrainian projects in practice have been about the upgrade of in-service
equipment.
Ukraine does, however, have a major focus on modernizing and improving its command and
control system, and has been seeking to improve communications between the MoD and the
General Staff and from the General Staff headquarters downwards. This is the major equipmentcentric change within the Ukrainian defence sector.
In thinking about acquisition, the Ukrainian General Staff appears to devote comparatively little
consideration of technologically-novel ways of building a capability and deciding at an early
stage the kind of system (such as a tank) that is needed. The conservatism of armed forces may
have a place here, but the shortage of funds which requires upgrades to the normal order of the
day, is likely more important. In writing requirements, the Ukrainian authorities are familiar
with the distinction between performance, or functionally-based requirements, and technical
requirements. Their procurement staffs are ready to use both but the latter approach is probably
more common for upgrade work.
In specifying requirements that are affordable, technologically feasible, and militarily valuable,
the Ministry of Defence authorities dealing with procurement have the lead in discussions with
industry and on information from the country’s research institutes. As described to us, the
requirements specification seems to be a sequential process in which the General Staff sets the
requirement and then the procurement staff explores its feasibility and cost. We could gain little
sense of users and procurers working in project teams to attain the optimum result.
2
3
International Institute for Strategic Studies, The Military Balance 2010, London, Routledge, p.195
White Book 2009: Armed Forces of Ukraine,
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As an important country to NATO, Ukraine is eligible and has received modest amounts of
military aid, but it has not developed a process within its government to match what external
donors might provide with what its emerging needs are. Neither Ukraine nor Georgia appear to
have thought hard about how they might best utilize aid offers from Western countries, and it
encountered problems in integrating US-supplied radios into its vehicles. It addressed interoperability issues rather late.
Financial Planning
In principle, the country has a 12-year plan for the overall development of its armed forces
(which does not include details of intended equipment purchases), and a six-year plan which
includes an acquisition program, and a two-year plan. In practice, the 2006-11 plan was based
on what proved to be completely unrealistic assumptions about the level of funding that would
be made available. The following statements from the 2009 Armed Forces White Book
demonstrate the scale of the problem:
The standard financial support for the fulfillment of tasks defined in the State
Programme for the Development of the Armed Forces 2006-11 was 32.4 billion
UAH.
Considering the financial crisis and the economic situation of the country, the
MoD has defined the minimum level as 17.5 billion UAH that would enable
support of the vital functions and the fulfillment of combat training activities.
The 2009 State Budget stipulated an allocation of 12.806 billion UAH (1.2% of
GDP)…
Actual financial support was 8.34 billion...4
In the financial circumstances, priority was given to salaries, and the costs of operating the
armed forces on a daily basis rose from 66% of the defence budget in 2008, to 77% in 2008, and
to 84% in 2009. Only 7% of the money allocated was spent on weapons, infrastructure, and
infrastructure modernization, around one sixth of what had been expected from a State Budget of
12.8 billion IAH. Nevertheless the White Book is upbeat about the deliveries of 19 different
systems that were made during the year.5
Given the reduction of planned spending, a major prioritization effort was needed, and this
appears to have been a pan-General Staff activity involving numerous meetings. We gained the
impression that all parts of the organization had a voice in this activity, rather than it being
dominated by the J5.
4
5
White Book 2009: Armed Forces of Ukraine, pp.19-20
White Book 2009: Armed Forces of Ukraine, p.27 and p.80
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Clearly, Ukraine does not follow any kind of rolling plan arrangement such as is practiced in the
UK Equipment Procurement Plan. A Ukrainian plan to cover the 2011-16 period is now in
preparation in 2010.
Ukrainian Defence Procurement (Contracting)6
Responsibility for Defence Procurement and the Ministry of Defence’s Procurement
Workforce. Defence procurement is effected by the Ministry of Defence, which like Albania
has a separate staff (and separate national legislation) for the procurement of military equipment,
and another staff for the procurement of the non-military works, supplies, and services that are
needed for the armed forces (uniforms and fuel were given as examples of these types of
procurements, together with purely commercial items and services). Military equipment (i.e.
armored vehicles) is purchased by the MoD’s Department of Development and Acquisition of
Military Equipment, and its non-military purchases are effected by its Department of State
Acquisition.7 Both organizations are staffed by civilians, although many have military
experience. The procurement staff of the Department of Development and Acquisition of
Military Equipment receives professional development education ranging from relevant masters’
degree programs and courses at the National Defence University, to foreign resident and on-site
programs such as those conducted by the U.S. Naval Postgraduate School. The Department of
State Acquisition is staffed by university graduates in procurement-related fields (e.g., its
Director is an economist), and they receive specialized education in procurement and the
applicable procurement-related laws.
Legal Framework and Authorities of Ukrainian Public and Defence Procurement
● A Dual System. Public procurement is governed by two main laws in Ukraine, one for
military equipment (i.e., weaponry and closely-associated items and services), and another for
non-military purchases, which is applicable to the non-military equipment purchases made by the
Ministry of Defence. In cases where an item has aspects of both military and non-military
application, Ukraine, like the other nations the Assessment studied (to include those based on the
EU Directives), makes a reasoned categorization of the procurement, and proceeds under the
appropriate laws and procedures.
● Background of Ukraine’s Post-Soviet Procurement Law. Ukraine’s first significant
post-Soviet legislation on public procurement was passed in 2000, and it was not modeled after
the existing European Union procedures, but rather on the United Nations’ Commission on
International Trade Law (UNCITRAL)’s On the Procurement of Goods, Construction and
Services, with Guide to Enactment.8 The 2000 legislation was amended over the next decade at
least ten times before passage of the 2008 Procurement Provision.
6
Ukraine has an established reputation for extensive corruption from which defense procurement is not exempt. It
ranks poorly in the Transparency International index. The comments in this country study chapter have to be
viewed with this in mind.
7
So-called because non-military equipment is financed with “state funds.”
This is similar to the situation in Albania where its post-communist government was initially advised on finance
and commercial law, as well as public procurement, by the UN and other international organizations that were
8
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● The 2008 Procurement Provision (for Non-Military Procurement). The immediate past
law for non-military procurement was the October 2008 Provision on the Procurement of Goods,
Works, and Services for the State (the “Provision”).9 The 2008 Provision was enacted to replace
and improve upon the previous authorities, some of which were determined to be noncompliant
with certain aspects of the WTO and European Union rules, and it was subsequently amended to
make it more compliant with GPA standards.10 Among the key reforms of the 2008 Provision
were the elimination of charges to Contracting Authorities for using the procurement notification
medium, the Public Procurement Herald, and the authority to provide tendering documents to
prospective contractors without charge. Those two reforms may have been initiated in part by
the report of a 2007 Ukrainian Ministry of Defence working group on defence procurement,
which was led and facilitated by faculty from the Naval Postgraduate School.11 The private bar
cites these changes as having had the effect of lowering the cost of tendering and also
encouraging the participation of medium and small businesses in public procurement.12
Nevertheless, the de jure authority of the 2008 Provision was short-lived. Vigorous legal and
legislative debate surrounded the Provision, and it was in effect canceled by the Parliament on
the grounds that a number of its provisions were contrary to Ukrainian law. This created a legal
void where public procurement was regulated by a combination of mostly secondary legislation
and practices that were remnant of the unobjectionable portions of the Provision and earlier law.
● The 2010 Public Procurement Law. Efforts to replace the Provision were not
immediately successful, as objections were constantly raised concerning the new draft
legislation’s compliance with Ukrainian law. After several amendments, to include some
proposed by the President, the legislators reached accord on an acceptable law in June 2010.
Legal commentators on international trade describe this new law as intended to effect a “a new
transparent and competitive environment in the area of public procurement in Ukraine as it now
sets up clear public procurement procedural rules and, what is even more important, the clear
procedural rules of legal challenging of the procurement decisions of public authorities.” 13 The
Law became effective on 30 July 2010.14
● Defence Procurement. Defence procurement is under the State Defence Order, and some
version of it has been in continuous effect since Ukraine’s independence.15 Ukraine, like other
concerned with the nation establishing a credible framework and familiar systems that would attract international
investment and trade.
9
Resolution of the Cabinet of Ministers of Ukraine No. 291, 17 October 2008
10
In comparison to WTO and GPA standards, the Provision contained no anti-competitive or protective provisions,
but it did contain anti-corruption provisions.
11
Ukrainian Defense Acquisition Reform Project, 2007 (Naval Postgraduate School, International Defense
Acquisition Resource Management Program)
12
Pavlo Barbul, of the Arzinger firm, writing in Public Procurement – Ukraine (Global Competition Review,
London, 2009) ¶3, at p. 240
13
See article on the new Procurement Law at Law-Now, by the CMS Cameron McKenna online information
service at www.law-now.com/law-now/mondaq (membership and registration required)
14
Like its predecessor Provision, and the State Defence Order (below), there are no English language versions of
the Law. This was confirmed by the Ukrainian MoD officials in charge of procurement.
15
Other authorities affecting defense procurement are the laws On Mobilization Preparation and Mobilization and
Preparedness, 2 March 2005, and On State Material Reserve, 12 March 2007, and the various regulations of the
Ministry of Defense.
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nations that have a procurement rule only for defence, models the defence rule after the basic
principles, procedures and practices for the rules for its non-defence procurement. The main
differences being in the level of competition and the absence of open tendering procedures
(discussed below).
● Other Authorities in Procurement. The Ministry of Economy is a central authority for
public procurement, and as such it plays a key role in the approval of procedures and principles
that apply to procurement with all state funds, even defence procurement. Other key
Government organizations for procurement are the Cabinet of Ministers, the Antimonopoly
Committee, Tender Chamber, Inter-Agency Commission, State Control-Revision Direction,
State Treasury, and State Committee of Statistics.16
Features of Ukrainian Procurement
● Procurement Principles. Contracting Authorities are required to be impartial, and persons
with conflicts of interest (having an interest in working on the awarded contract is given as an
example) are precluded from being on the tender evaluation committee.17
● Procurement Procedures. The 2010 Law for the procurement of non-defence equipment
provides, like its predecessor Provision, for open tendering , limited tendering (called
“restricted” in the English language versions of other systems), “two-stage” tendering, bidding
(quotes), and procurement from one participant.18 The open procedure, which is the basic
procedure for non-defence procurement,19 would not be appropriate for a security-related or
technically complex procurement, but the “two-stage” procedure seems well suited for a
complex procurement. The two-step process in Ukraine is a negotiation where participants are
invited to submit their proposals and then engage with the Contracting Authority over the
technical solution and price.20 This Ukrainian process is similar to the EU competitive
dialogue.21
The predominant procurement procedure under the State Defence Order is “closed.”22 In this
process, the Contracting Authority solicits the contractor and negotiates a contract, and the
16
The above-mentioned Ukrainian Defense Acquisition Reform Project, 2007 cited overlapping duties among, and
layered approvals required from, the Tender Committee, Inter Agency Committee (which has representatives from
Parliament and government agencies), and Anti-Monopoly Committee, as a source of inefficiency. Since 2007, it
appears that the Anti-Monopoly has assumed a more decisive and authoritative role in procurement.
17
Prov., 18. Note: The principles to which we have attached a citation from the Provision (“Prov”) have survived
in the new 2010 Law. Those observations, as well as observations about the 2010 law, are courtesy of the law firm
of Shulman, Rogets, Gandel, Pordy and Ecker, PA, Potomac MD.
18
Prov., 19. The English language descriptions of the Ukrainian procedure `of “two-stage tendering, bidding
(quotes), and procurement from one participant” is verbatim with the English language terms used 18-22, indicating
the continued influence of UNCITRAL on Ukrainian procurement law.
19
Prov., 20
20
Prov., 69-71
21
Barbul, id, at ¶22, p. 242
22
“Closed” was the English language word used to describe the process, and the Assessment was advised that any
use of the word “negotiation” in connection with the closed process should not be interpreted to imply a competitive
process.
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selection of the solicited contractor is subject to approval above the Contracting Authority
level.23 A key feature of this process is that Ukrainian law restricts prime contracts for military
equipment to Ukrainian companies. In practice, this mandates subcontracting, teaming, or
Ukrainian-led joint ventures in concert with foreign contractors in instances where Ukrainian
industry does not have the capacity for a defence project.
Award Criteria. The basic criterion is a combination of price24 and non-price factors such as
delivery schedule, the contractor’s performance history, quality and functional characteristics,
ecological considerations, after-sale maintenance, payment terms, technology transfer, to include
the training of management and technical personnel, and the use of local personnel and
resources. For very basic or commercial purchases, lowest price can be the criterion.
Review Procedures. Review procedures were identified as a source of impediment to Ukrainian
procurement by the 2007 working group. There were a high number of “applications for review”
filed in Ukraine, and it was complained that many of them were pro-forma, lacked substance,
brought the system to a halt, and often resulted in cancellation of the procurement action or the
awarded contract. That appears to have changed. The 2010 Law is intended to improve the
review process (see above).25 The administrative challenge functions are now (again) vested
with the Antimonopoly Committee. In short, the MoD officials the Assessment interviewed did
not express the concerns about review procedures that were voiced by the 2007 working group.
Ukrainian Defence Industry
Ukraine has an extensive state-owned defence industry that was established in its Soviet era, and
which currently includes some design and modification capabilities, as well as a capacity for
technical testing. Its products include armored vehicles, missiles, ships, and aircraft. This sets
Ukraine apart from the two other protectionist-inclined countries studied by the Assessment,
Poland and the Czech Republic, in that it has a domestic heavy defence industrial capability. For
this reason, Ukraine, which faces no immediate conventional threat, remains intent on
maintaining the viability of that industry, perhaps to the decrement of its ability to recognize, or
at least to plan and budget for, more needed and realistic defence capability.
Although Ukraine is committed largely to the purchase of its systems from its domestic defence
and engineering industry, its budget is so constricted that its defence industry has become exportoriented. It has made some significant sales, including some to Iraq, which have been condoned
by the US, and of course its Antonov-based firm has a long-standing significant contract with a
consortium of NATO countries for the supply of flexible air freight services. The Ukrainian
defence industry, therefore, would welcome Ukraine’s political shift towards and cooperation
with Russia.
Support and Ensuring Capability from Kit
23
The Anti-Monopoly Committee has this approval authority, with input from the Tendering Chamber and Inter
Agency Commission.
24
Price cannot be less than 70% of the criteria weighting in non-defense procurement
25
However, apparently the status quo remains as to the ability to initiate a review action – anyone can.
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Support of equipment is a General Staff responsibility whereas procurement of new items is run
by the Ministry of Defence. Despite funding constraints, the Ukrainian military claims that it is
able to maintain the training and readiness levels needed to carry out important missions.
However, it may be that its equipment availability is sustained by simply not using it very much
and the IISS reports that “the overall serviceability of the fleet is assessed as low.” It also
observes that the flight time for its aircraft flying averages only 40-50 hours a year. 26
Ukraine has long operated a conscription system that now requires only one year of active duty.
This means that training and experience in maintenance and repair skills is minimal and therefore
all but the most basic maintenance has to be outsourced to civilian operators, which provides
these services at military bases as well as in its own plants. This need for industrial support is a
further reason why Ukraine normally only considers indigenous equipment for procurement.
Ukraine does rely on warranties for some of the equipment it obtains from its national industries.
It is clear that the Ukrainian authorities do consider seriously support performance, reliability,
repair times, equipment availability, etc. In that regard, they are moving their repair and
maintenance regime from a time-based system, where the dates for replacements were fixed, to a
more complicated but hopefully better value arrangement in which parts are replaced when
needed.
Like Germany, Ukraine operates units of support troops who work for the armed forces as a
whole rather than the separate services.
From Kit to Capability and the Whole-Life, Whole-System Perspective
In terms of taking in-service into account early in the acquisition process, in order determine
where affordability over the long term and where value lies, Ukraine has not acquired major
novel systems beyond its command and control program. It has therefore not sought to assess
affordability at an early stage of a project in terms of support costs. Also, it has no formal model
similar to the UK’s TEPIDOIL structure, to assist in the effective introduction of novel
equipment and the assuring all the elements of capability to supplement equipment. However,
with its command and control program, it has discovered some wider aspects of acquisition, in
particular regarding the infrastructure needs of the digitization systems. We were also told of
unexpected challenges in arranging support for US-supplied Hummer vehicles. However
Ukraine has its own clear sense of military readiness, and places particular emphasis on the
completion of appropriate training, and cannot be said to assume that possession of a piece of
equipment means that capability can be taken for granted.
Disposal
This is a topic of some importance in Ukraine, which has a large number of ageing systems and
munitions. It has disposal plans which it has not been able to implement because of the costs
involved. The 2009 Defence White Book reported:
26
International Institute for Strategic Studies, The Military Balance 2010, London, Routledge, 2010, p.196 and
p.197.
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Low disposal rates of rockets and ammunition not suitable for further use and
storage are constraining the fulfillment of activities to combat and numerical
strength of the armed forces and increase the combat potential of units, through
additional expenses on the maintenance of surplus military facilities.
Only six out of 16 arsenals, bases and warehouses not listed in the future structure
of the Armed Forces … were disbanded between 2006 and 2009. In 2009 the
initial planned expenditure in this area suffered the same fate as defence spending
as a whole. The original intention was to spend 33.3M UAH and the amount
eventually spent was 8.4M UAH. In terms of weight, Ukraine still managed to
dispose of over 20,000 tons of ammunition and, with international help, of a
considerable amount of rocket propellant27.
The Role of Parliament
As shown in the legislative debate over the passage of a new Procurement Law, the Ukrainian
parliament, the RADA, is legislatively engaged with regard to the organization and operation of
defence and procurement. The response to a number of our questions was “the law says that …”
The Parliament also approves the defence budget. Its oversight of defence is led by its Defence
&Security Committee, which may be seen to play a “tough love” role, supporting defence as an
activity but demanding effective and efficient use of the resources provided. A number of
Defence Committee members are former military officers. However, the reports of the Defence
Committee appear to attract little public attention.
There appears to be no body equivalent to the GAO in the US or the NAO in the UK with the
resources for research and which can audit defence and to make suggestions for improved
performance.
Conclusion
For such a large country with uniformed armed forces of 150,000, somewhat but not a lot smaller
than those of the UK, Ukraine has a tiny defence budget of less than $1 billion which accounts
for less than 1% of GDP. It operates predominantly equipment inherited from the Soviet era, and
it is not surprising that its system for the acquisition of major new systems is at best rudimentary.
There is no formal acquisition cycle nor a system for the definition of projects with time, cost
and performance parameters.
For the moment, the Ukrainian armed forces seem to be focused on professionalization and
survival in hard times, rather than on improved capabilities based on equipment acquisitions.
However, their White Book reflects real ambition to reach readiness levels and capabilities that
have been specified with some care.
The country has an educated population with good engineering and social science backgrounds.
Should the economy improve, and more funding become available for new defence projects, it
27
White Book 2009: Armed Forces of Ukraine, pp.15-16
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has the potential to develop and operate a more sophisticated acquisition system. However,
some staff probably under-estimate the challenges of effective defence acquisition even when
more funding is available.
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Chapter 8
The United Kingdom
Introduction
The UK defence acquisition system has some paradoxical features: on the one hand, there is
long-standing dissatisfaction with its performance, both within the defence establishment and
without. This has resulted in more or less continuous efforts to introduce improvement,
sometimes involving quite extensive change, and even today the system remains in a state of
evolution. What is offered here is a photograph of the situation in 2010 along with some
estimates of possible developments. It is quite likely that in the next five years there will be
further attempts at significant reform, indeed a significant document was issued by the MoD just
as this paper was being drafted.1 On the other hand, the UK system is monitored, even admired
and sometimes imitated by a number of developed states, who have selected from its innovations
and adapted them to their own environment.
Guidance from Defence Policy
During the Cold War, economic and political constraints pressed the UK gradually to abandon
almost all its commitments beyond the NATO area and successive White Papers made clear that
the UK’s efforts were to be focussed on the defence of UK territory itself, protection of the North
Atlantic sea lanes, the effective defence of the UK zone of responsibility in the Federal German
Republic and the development and maintenance of the UK’s independent nuclear deterrent.
Thanks to US help with the latter after 1960, the UK was able also to afford sizeable and capable
conventional forces to give credibility to the NATO flexible response doctrine and thus assure
the US that a significant conventional defence effort was being made in Europe. By the middle
of the 1980s very little attention or resource was given to maintaining “out-of-area” although a
Falklands garrison had to be maintained after the 1982 war with Argentina.
The decision to play a prominent part in the operation to free Kuwait in 1991 was an ad hoc
choice to deal with an unexpected problem, as was the rather reluctant UK decision to send
military forces to the Balkans after 1992. The Labour Government elected in 1997, however,
undertook an extensive defence review which provided formal guidance for most defence
activity including acquisition. The Strategic Defence Review published in 1998 recognised the
UK as having extensive international interests and responsibilities, judged that a strategic
conventional threat to Western Europe was not on the horizon, and focussed UK force
development on the capacity to conduct expeditionary operations. There was an assumption that
a “large scale” combat operation would only be conducted in conjunction with the United States
and the intention was that the UK contribution to such an operation would be sufficiently large
and capable as to give the UK real influence over the shape of the campaign. The Army’s
interpretation of large scale was a division able to conduct armoured/mechanised warfare. The
Royal Air Force (RAF) and Royal Navy (RN) had their concepts of what “large scale” would
mean for them. A rule of thumb informally recognised in at least some of the MoD was that the
1
Ministry of Defence, Defence Strategy for Acquisition Reform, London, Ministry of Defence, March 2010
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UK should be able to contribute at least 15% of a multi-national force in order to expect to have
satisfactory voice regarding the campaign.
The focus on expeditionary operations, the scale of desired capability, and the ambition to be
able to work at the same tempo as US forces from the first day of a major operation clearly
offered significant steer to those conceiving the acquisition of new equipment and services.
Arguably it led the UK to define requirements that later proved demanding, with significant risk,
and difficult to afford.
A significant problem with the UK policy, implicit before 1998 but explicit thereafter, was that it
was not much help in seeking to prioritise among competing claims. Almost any sort of military
equipment could be justified as furthering UK policy ends. UK defence policy was and remains
extremely ambitious given the resources that the government (and society as a whole) was happy
to see allocated to defence. Moreover, with the campaigns in Iraq and Afghanistan, UK policy
became even more ambitious, with the removal of any geographic limit on where the UK might
be called on to act and the need to recognise that the capability to sustain a division-plus,
protracted combat operation needed to be put in place.
There are formal, logical links involving several steps between UK policy and acquisition
choices. Defence policy was interpreted and refined in a classified Defence Strategic Guidance
document which was reviewed regularly/annually (from 2010 this was replaced by Defence
Strategic Direction which was intended to have a longer-term outlook and better recognise
resource constraints). From the SDR the types of mission that UK forces were to be able to carry
out under UK policy were laid down and almost 20 military tasks specified to enable the
execution of these missions. Capabilities needed to execute the tasks are defined, guiding
equipment and services acquisitions. The MoD also maintained a set of about 50 scenarios
involving a range of possible operations. These scenarios were approved as compatible with UK
policy and the assumptions about future security that underpinned it, and operational analysis
could be used to assess the value of any particular capability in a number of scenarios. In 2010
the scenarios were under review with the intention to reduce to a smaller number.
The Conservative-Liberal Government elected in May 2010 initiated a Strategic Defence and
Security Review (SDSR) that, in the light of the government’s overall financial position, seemed
certain to lead to a reduction in the scale of UK defence ambition, although it seemed likely that
an emphasis on the need for force projection capabilities in general would remain.
The Role of the Legislature in Defence Acquisition
The British Parliament comprises of an elected House of Commons and a non-elected House of
Lords comprised predominantly of life members chosen by all political parties for their services
to politics, academia and other areas of national life. In addition it still has 92 hereditary peers.
The House of Lords has been changed significantly in the last two decades and further reform
remains a strong possibility. The House of Lords has a much, much smaller influence on
decision-making than the Commons, especially on defence matters, but it is a chamber in which
views aired, especially by retired very senior military officers, can achieve at least significant
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press coverage. Retired chiefs of the defence staff are normally awarded a peerage, i.e. made
members of the House of Lords.
As in other western democracies, the Parliament approves the defence budget, passes defencerelated legislation, debates on occasion defence matters, and oversees the defence efforts.
Not least because of the strength of the party system in the UK, the Parliament has a small role
with regard to the defence budget. Put simply the Executive proposes the budget as a whole,
including defence, and the Parliament approves it. In principle, the budget could be rejected, but
this has never happened. Moreover, compared with the US Congress or even the German
Bundestag, the UK Parliament sees almost no detail of the defence budget. Certainly spending
planned for individual projects is not revealed.
Parliament traditionally has not legislated about defence acquisition, although there is obviously
legislation addressing the legal status and regulation of the armed forces, the ministry of defence,
and public procurement in general. UK acquisition authorities do not have to be concerned about
meeting legislated requirements regarding small businesses, minority groups or anything of that
effect.
The Parliament and in particular the House of Commons is more rigorous in its oversight of
defence. Full defence debates are rare but probing parliamentary questions are not unusual.
Two committees, the Public Accounts Committee and the Defence Committee, undertake several
investigations a year on defence matters that draw their attention. They are supported by small
staffs and ad hoc specialist advisers brought in for specific studies. They are also supported by
the more extensive resources of the defence team at the National Audit Office (NAO), which
reports on defence acquisition matters on a regular basis. The web-sites of these bodies provide
much published material on defence, but of particular importance here is the Ministry of
Defence: Major Projects Report which the NAO produces on an annual basis2. This examines
the top 20-25 projects by value in the MoD’s programme and seeks to explain changes in their
schedule, cost and performance. The US GAO has begun to publish similar to the MPR since
the start of the century and the Australian NAO has followed suit more recently.
The MoD is not obliged to release classified information to parliament or its NAO agent, and its
ability to control information puts limits on what can be discovered. But both the NAO and the
House of Commons Defence Committee have what might be summarised as a sympathetic
interest in defence, and normally seek to offer constructive criticism rather than simply allocate
blame. The two sides have a wary relationship in which each recognises the need for the other’s
existence and those responsible for oversight have awareness of the many challenges of running
defence. The finance-focused Public Accounts Committee, on the other hand, sometimes issues
more trenchant comments on the MoD’s performance.
Requirements Generation
2
Report of the Comptroller & Auditor General, Ministry of Defence: Major Projects Report 2009, London, HMSO,
December 2009, http://www.nao.org.uk/publications/0910/mod_major_projects_report_2009.aspx
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Responsibility for the generation of requirements is the responsibility of a pan-defence, Ministry
of Defence Main Building organisation called the Equipment Sponsor (formerly the Equipment
Capability Customer) headed by a three-star Deputy Chief of the Defence Staff (Capability).
This organisation has eleven one star Heads of Capability with areas of responsibility that often
cover more than one branch of the armed services: Strategic Deployment, for instance, overseas
air and naval transport assets. These eleven are overseen by four two-star Directors of Capability
responsible for. They are supported by largely civilian research & technology staff and a
financial group, each headed by a two star civil servant. There is also a section in this
organisation devoted to the UK’s strategic deterrent.
To generate requirements, the Capability Sponsor staff lead Capability Planning and
Management groups comprising of representatives from the MoD’s central staff (covering policy
and money), the Defence Equipment and Support (DE&S) organisation (concerned with
procurement and in-service support), single service staff (representing the users), and the
Research and Technology community (with expertise on technological feasibility). These people
make up what is known as the MoD Unified Customer, with the Capability Sponsor in principle
having the leading voice among them.
There is an evolving set of formal processes, under the heading of Through-Life Capability
Management (TLCM), through which capability areas are defined, gaps identified and plans put
in place to fill them. Much is laid out in the MoD’s web-based guidance system, the Acquisition
Organisation Framework (www.aof.mod.uk).
A key element of UK process involves the approval by the Ministry as a whole of emerging
requirements. In principle, this approval must be eventually be given by a political authority, a
minister, but in practice most detailed scrutiny of proposals is delegated to public servants.
There are two main approval points, known as Initial Gate and Main Gate. The normal
endorsing body is the four-star Investment Approvals Board, (which can delegate its powers to
lower ranking staff for less expensive projects). For the largest and most sensitive projects,
however, approval can involve the IAB’s senior body, the Defence Board, which is the most
senior non-ministerial committee in the ministry. Finally a few projects merit real ministerial
and even governmental examination before being finally signed off.
The UK has adopted a six point acquisition cycle (Concept, Assessment, Demonstration,
Manufacture, In-service and Disposal) with Initial Gate approval being required to proceed
beyond the Concept stage. Initial Gate involves endorsement of a User Requirement document
as valid and under UK policy and there is some analysis of affordability and intended
procurement approach. At Main Gate, the Systems Requirement Document (to ensure user needs
are met) along with more detailed assessments of risk, affordability through the life of the
project, and procurement strategy, are all covered in the ‘Business Case’ prepared mainly by the
project team in the DE&S working with the Capability Sponsor. The project overall then
receives approval by the IAB, or is sent back for further work.
Financial Planning
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Although envisaged affordability is one element in the approval of an emerging requirement,
there is no assurance of funding that automatically follows.
The UK seeks to plan its equipment acquisitions over a ten year period in the Equipment
Procurement Plan, supplemented by the Equipment Support Plan for when the equipment is in
service. There is a complicating factor in that the UK Government uses an accounting system
similar to those found in the commercial world called Resource Accounting and Budgeting. This
means that the Ministry is subjected to limits on the total amount that the Treasury will spend on
defence in a year, Capital Departmental Expenditure Limits (CDEL) and Resource Departmental
Expenditure Limits (RDEL). The Equipment Plan includes both CDEL (money spent on
projects before Main Gate) and RDEL (money spent before Main Gate). When, as is sometimes
the case, CDEL is more available than RDEL, it becomes one of a number of pressures for Main
Gate to be taken early, before a project has been thoroughly de-risked. These other pressures
include the common desire of project teams and their sponsors to have projects firmly
established so that they cannot be easily abandoned.
The guidance to the Capability Sponsor staff responsible for managing the Equipment
Procurement Plan was that they should work on the assumption of level funding in real terms for
defence equipment. However, due to some projects costing more and taking longer than
expected, and to governmental reluctance to cancel approved projects altogether, the Plan in
early 2010 contained more commitments than the Ministry could expect to be able to fund.
Information published in the report by an independent consultant, Bernard Gray, in mid-2009,
showed an Equipment Plan rising at about six per cent a year for the next decade in cash terms.
The National Audit Office and the House of Commons Defence Committee estimated that there
was a minimum of a £6 billion shortfall over the next decade3.
The incoming Conservative Government instigated a review of all departmental spending after
May 2010, and the results of this review will be announced in the Comprehensive Spending
Review exercise to be announced at the end of October 2010. The best that the MoD could hope
for appeared to be level spending in cash terms for the next four years, and so the SDSR exercise
is including plans to cut back the Equipment Plan in significant ways.
The British Government has sought to give departments a stable basis for planning their
expenditure and the MoD receives from the Treasury some assurance of its allocation for up to
three years ahead. However, these assurances can be disrupted by external developments such as
the international financial crisis from 2008 as well as by unexpected changes in the MoD’s
needs. Thus the UK MoD undertakes an annual Planning Round in which it works out detailed
expenditure plans for the forthcoming year. As far as equipment is concerned, this can involve
the undertaking of extensive “Options” exercises in which changes to one project or activity are
compared for their value with changes to another. Under conditions of extreme financial
3
House of Commons Defence Committee, Defence Equipment 2010, London, The Stationery Office, 23 February
2010, http://www.publications.parliament.uk/pa/cm200910/cmselect/cmdfence/99/9902.htm; Report of the
Comptroller & Auditor General, Ministry of Defence: Major Projects Report 2009, London, HMSO, December
2009, http://www.nao.org.uk/publications/0910/mod_major_projects_report_2009.aspx
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difficulty, the Planning Round may not be completed until or even after the start of a new
financial year at the beginning of April.
As projects evolve through the financial year, it is the responsibility of the Chief of Defence
Materiel to ensure that over-spending on both equipment and support does not occur. He is the
Top Level Budget holder, in MoD parlance. This means that the DE&S, in consultation with the
Capability Sponsor staff, may have to make in-year changes to the allocations to individual
project teams, although this is not widely perceived as a major or common problem.
In short, the Ministry seeks to assess the affordability of projects from an early stage in the
approvals process and through the maintenance of an Equipment Procurement Plan. However,
affordability is an issue that has to be addressed on a continuous basis.
Procurement
The UK has a single organisation, Defence Equipment & Support, which is responsible for
procurement of equipment and equipment support for all the armed forces. Through its Joint
Supply Chain organisation, it is also responsible for the support of UK forces (people and
equipment) deployed on operations.
The DE&S Project Teams normally look after a number of projects, some of which may be in
service and some in development. The teams comprise specialists in engineering, finance and
commercial matters (the three main career streams in the DE&S), with risk management, project
management, systems engineering, supply chain and inventory management being other
important perspectives. The DE&S is seeking to build more flexibility into its staffing
allocation, so that some specialists, for instance in safety, can be brought into teams on a
temporary basis when they are most needed.
The default procurement strategy in the organisation is competitive tendering, and the UK has
for many years advertised most of its procurement intentions and invitations to tender in the
Defence Contracts Bulletin, a freely available private publication. The virtues of competitive
tendering have been recognised particularly since the Conservative Governments of Mrs.
Thatcher from 1979 onwards, and competitively tendered contracts became dominant
numerically and in terms of the total value of MoD contracts awarded. The MoD has processes
to promote the fair implementation of competitive tendering strategies, and of course national
and European law is of relevance here. However, unlike in the US, defence companies are
reluctant to appeal legally against contract award decisions.
However, there is today some questioning of the relevance of competition in the increasing
number of cases where there are only a small number of suppliers in the world and perhaps only
one in the UK. Even when competitions have been held, there have been many cases where the
winning bidder has been unable to deliver on its commitments and contract adjustments have
been needed, a phenomenon not unknown in the US. The proportion of contracts awarded on a
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competitive basis has apparently peaked4 and certainly the UK is interested in how best to secure
value when only one realistic candidate supplier is available.
Partnering is a term that is used increasingly to summarise the desired relationship between the
MoD and a contractor, certainly once a contract has been signed. There is recognition in the UK
that an adversarial relationship between the MoD and a contractor is unlikely to generate
outcomes satisfactory to the Ministry. In general, the MoD would like to promote the kind of
mutually supportive relationship among suppliers and customers that are likely to be found in
many successful areas of the commercial world, but at the same time there is widespread defence
endorsement of the value of taut and clear contracts in which the obligations of each party are
spelled out.
One particular procurement vehicle that has been widely used by the MoD, but whose popularity
has probably peaked, is the Private Finance Initiative (PFI). This involves the government
contracting for the delivery of a service (such as international communication over satellite) over
a significant period (normally at least ten years). There is normally scope for varying the amount
of the service required over time. Using external finance, the winning bidder itself buys the
capital equipment needed to deliver the service and adds the human and other elements required.
One advantage of this approach is that, because the MoD pays monthly for a service, it may be
able to keep the capital investment associated with the project off the government’s balance
sheet, i.e. it would not count as an element in the UK national debt. However, this depends on
national accounting regulations operated by the Treasury: in cases where a project has low risk
and the MoD is the predominant user of the service, the MoD usually has had to include the
capital value of an asset on its balance sheet. The MoD has concluded over 50 PFIs, many for
accommodation and training services, and 15 of them are on its balance sheet.5 PFIs have been
used for equipment-based services in direct support of operations including communications
(satellites and ground terminals) and transport (roll-on-roll-off ferries, tanker/transport aircraft
and heavy equipment transporters).
The standard means by which the UK assesses its procurement success involves measuring
deviations from the time, cost and performance targets set when a project is approved at Main
Gate. As noted, the National Audit Office addresses the major projects annually in a detailed
report. However the NAO is concerned that this is too narrow a focus and does not take into
account how well a project is prepared for and operates in the in-service phase, and it is
reviewing its approach.
As in the US, UK procurement tends to go according to plan with regard to smaller, lower risk
projects which can be delivered within a small number of years. By number the DE&S finds
that, by number, 90% of projects are delivered on cost and 80% on time6 For larger, riskier
4
Defence Analytical Services Agency, Defence Statistics 2009, London, Ministry of Defence, Chapter 1,
http://www.dasa.mod.uk/modintranet/UKDS/UKDS2009/c1/table115.html
5
Details of Private Finance Initiatives can be found in Ministry of Defence, Annual Report and Accounts 2009-10,
London, Ministry of Defence, 2010
http://www.mod.uk/DefenceInternet/AboutDefence/CorporatePublications/AnnualReports/MODAnnualReports091
0/
6
General Sir Kevin O’Donoghue, Chief of Defence Materiel, Desider, March 2010, p.3
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projects the results are less pleasing, and the NAO regularly finds both cost increases and time
delays, although the overwhelming majority of key requirements are met. As noted in the
section on financial planning, delays and cost overruns disrupt finances, and problems with a
small number of projects can result in others having to be delayed, which often means they too
increase in cost.
Procurement (Contracting)
The Strategic Role of UK Procurement
The political and operational background to the technical and legal aspects of contracting can be
summarized as follows. The UK is an excellent example of the established procurement system
of a strategic power that is engaged in deployed tactical commitments, and is therefore
concerned with continuous and assured supply of supplies for its forces. Twenty-five years ago,
the British Government was clearly pursuing fully open competition in defence acquisition, with
emphasis on “best value for the money.”7 Today, while its focus is still best value, there is more
emphasis on alternatives to a straight purchase, (such as public-private initiatives and
cooperative programs with select allies) and the concept of the UK “operational sovereignty.” 8
A key document on, if not the genesis of, “operational sovereignty” was the 2005 Defence
Industrial Strategy White Paper,9 or DIS, which the Government subsequently sought to clarify
in order to explain that it was not intended to be protectionist manifesto for reliance on UK
contractors.10 There is further brief discussion of this topic in the Defence Industry section
below.
The Legal Framework and Rules of UK Procurement
The Basic Legal Authorities: The UK does not have one legal system. There is one for
England and Wales, one for Scotland, and another one for the Northern Ireland. Defence
procurement is conducted by the Ministry of Defence under the laws for England and Wales.
The EU Procurement Directives (the Public Procurement Regulation 18/2004/EC and the
Utilities Regulation, 17/2004/EC) are implemented by Great Britain in legislation called the
Public Contract Regulations.11 The PCRs closely follow the European Union Directives on
Procurement and the EU Remedies Directive.
Defence Procurement: The PCRs do not apply in cases of procurement where the matter is
secret,12 or the Government claims the exemption of Article 296 of the EU Treaty. 13 However,
7
This imitative was dubbed the Levine Reforms (after Peter Levine, Chief of Defense Procurement)
A key, if not the genesis of ‘operational soveignty” was the UK’s 2005 Defence Industrial Strategy White Paper,
or DIS, which the Government felt compelled to explain
9
Ministry of Defence Policy Paper No. 5, Defence Industrial Policy, October 2002 (available at
http://www.mod.uk/nR/rdonlyresb
10
See Bialos, C.E. Fisher, and S.L. Koehl, Fortresses and Icebergs, The Evolution of the Transatlantic Defense
market and the Implications for U.S. National Security Policy, (Washington, D.C.: Center for Transatlantic
Relations, 2009) Vol. II at p. 593
11
Statutory Instrument 2006, No. 5, The Public Contract Regulations 2006, 31 January 2006
12
PCR 6(2)(b)
8
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the UK does not have a special “defence rule” for defence procurement,14 and, in practice, the
MoD, when it determines to procure, proceeds using basically the negotiated procedures of the
PCR. Most MoD defence procurement opportunities are advertised in the Ministry of Defence
Contracts Bulletin and through the European Defence Agency – UK defence contracting is rather
transparent, open, and competitive.
Notable Aspects of U.K. Procurement.
procurement practices and procedures.
These are some notable aspects of the UK’s
● The UK’s Common Law Tradition. Great Britain obviously has a common law legal
tradition (it having invented the common law). However, as a Member State in the European
Union, it must adapt to a more civil law style.15 Nevertheless, the influence of a common law
approach is apparent in British procurement. For example, the PCRs do not have any rules
specifically addressing personal conflicts of interest in the procurement process. 16 Nevertheless,
British Contracting Authorities take corrective action to mitigate or eliminate personal conflicts
of interest without specific regulatory authority, reasoning that their authority flows from larger
and more general rules, such as that requiring equality of treatment to all competitors, 17 and that
in fact is how the matter of personal conflicts of interests is approached in the U.K.18
● UK Contracting Procedures. The UK employs the basic contracting procedures,
methods, and arrangements of the EU Procurement Directives. The processes include the open
procedure,19 the restricted procedure,20 the negotiated procedure (with and without notice),21 and
the competitive dialogue.22 The procedures employ the basic European public procurement
process of unrestricted ability to submit tenders (the open procedure), or Contracting Authority
selection after a preliminary submission by the vendors (restricted, negotiated and competitive
13
PCR 6(2)(c)
Many observers think the passage of the August 2009 EU Defence Directive will prompt the UK to establish
either a section in the PCR for defense procurement, or to issue a separate defense procurement regulation.
14
15
The most obvious difference between the Civil and common Law systems is that the Civil Law legislates are its
laws into a code, whereas the Common Law still has many of its laws and legal principles in the individual cases
decided by judges in the course of an actual legal dispute.
16
Interestingly, there is a code of conduct that addresses this at the local level, the Local Authorities Model Code of
Conduct, Order 2007, SI 2007/1159. The PCRs do have objective criteria for the disqualification of a contractor,
PCR 23(1)(a) through (f) and 23(4), but they do not include conflicts of interest.
17
S. Roe and D. Harvey, United Kingdom, Public Procurement, Global Competition Review (London 2009), at ¶27
p. 247
18
See Fairclough Building LTD v. Borough Council Port of Talbot (1992) 62 BLR 86 (Contracting Authority
correctly removed a member of the tender evaluation team that was related to a bidder – and also disqualified the
bidder), and R v. Holderness Borough Council ex p Jones Developments Ltd (1992), The Times Law Reports, 629
(fact that an evaluator was a business rival of a bidder did not warrant corrective action. The facts of the
Fairclough case were closely mirrored in a case decided by the ECJ Court of First Instance in AFCon Management
Consultants v. European Commission, Case T-160/03, where it reached the same result as Fairclough.
19
PCR 15
20
PCR 16
21
PCR 13 and PCR 14, respectively
22
PCR 18
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dialogue). The default method in the U.K is the open procedure or restricted procedure, 23 which
do not involve true negotiation, and which are therefore not the best suited to a complex
procurement, such as would be typical in satisfying a defence requirement. The PCR permits the
negotiated and competitive dialogue procedure under stated conditions, and these are commonly
employed when conducting procurement for defence items.24 Other procurement solutions and
features in the PRC include “framework agreements,”25 where the basic terms are set and a series
of vendors can be selected with whom the Government, may, but is not required to, place orders
in the future; “dynamic purchasing,”26 which is electronic commerce (best suited to commercial
items); and procurement by “central purchasing bodies,”27 where one Contracting Authority can
contract so as to satisfy the needs of several government customers. The PCR also allows
Contracting Authorities to engage in electronic auctions in the selected procedure in order to
arrive at the lowest price.28
● Criteria for the Award of a Contract. The PCR established two basic criteria: the lowest
price,29 or the “most economically advantageous,”30 the latter of which would typically be used
in a more complicated or technical purchase. In the case of the most economically advantageous
criteria, the Contracting Authority will consider, in addition to price, factors such as quality,
technical merit, aesthetic and functional characteristics, environmental characteristics, running
costs, cost effectiveness, after sales service, technical assistance, delivery date, delivery period,
and period of completion.31 The Contracting Authority must advise vendors in the contract
notice of the criteria to be considered, as well as the weighting assigned to each factor, 32 which
may be in terms of minimum and maximum weights.33
● Selection of Invited Tenderers Under the Restricted and Negotiated Procedures. In
the UK and elsewhere in Europe, those responding to the notice of a contracting opportunity
under restricted or negotiated procedures are not submitting tenders (as in the “open procedure”).
Rather, they are submitting an initial response in the hope to be invited to engage in negotiations
or to submit a tender by the Contracting Authority. In this regard, the question arises (and is not
always answered by a nation’s rules) as to what standard the Contracting Authority will apply to
determine which vendors will be invited to tender. The UK PCRs take the mystery out of this.
In using restricted or negotiated procedures, the vendors have to satisfy only the minimum
qualifications set out in the notice. Those satisfying those requirements will be invited to
23
Reg. 12(1)
Reg. 12(1)(i) and (ii). The August 2009 EU Defence Directive is more flexible in allowing Contracting
Authorities to employ these forms of procedure.
25
Reg. 19
26
Reg. 20
27
Reg. 22
28
Reg. 21. For example, this might be a process used as one part of an Open Procedure procurement, or as a stage
of a procurement using the Restricted or a competitive Negotiated procurement.
29
Reg. 30(1)(b)
30
Reg. 30(1)(a)
31
Reg. 30(2)
32
Reg. 30(3)
33
Reg. 30(4)
24
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continue.34 However, if the Contracting Authority anticipates considerable competition, it can
make its selection based on additional (e.g., comparative quality) criteria so long as participants
are advised in the notice and the criteria is clearly identified.35 In this case, the PCR requires that
the field of tenderers be at least 3 and that the maximum number be specified in the notice.36
● The UK’s Use of the Competitive Dialogue. The competitive dialogue is a relatively new
procedure that is reserved for “particularly complex cases,”37 where the requirement is known,
but the procurement solution, or at least the best procurement solution, is not clear. It has its
genesis in the late 1990s, when the European Commission acknowledged the need for a process
that was more transparent than the negotiated procedures, and suggested “a new standard
procedure, the competitive dialogue, which would operate alongside the open and restricted
procedures and would replace the existing negotiated procedures.”38 The process was introduced
in the U.K. in January 2006. It begins with a notice; proceeds to a selection and invitation
process, as in a restricted and negotiated procedure, and then advances to technical discussions
and finally price negotiations. It is a rather sophisticated technique, which the EC Procurement
Directives (2004/18/EC and the 2009 Defence Directive), and most nations studied in the
Comparative Assessment, authorize, but which few employ. The U.K. has made comparatively
frequent use of this procedure, and its internal guidance on the use of the procedure is the most
complete treatment of the subject that the Assessment has located.39 The process is not without
its critics, however. It apparently avoids the objectionable aspects of the old negotiated
procedures, but its rules permit a questionable range of flexibility in making and evaluating the
final tender, and even somewhat modifying the tender after the selection of winner. 40 Also, the
competitive dialogue has often turned into a rather time-consuming, and expensive proposition.
In that regard, the UK PCR - uniquely - authorizes the Contracting Authority to reimburse
participants for the costs they incur in the competitive dialogue.41 This provision recognizes that
the requirements involved, and the efforts required, might be so novel, complex, or procurementspecific so as to discourage participants unless there was some provision for the recovery of their
proposal costs. That said, the UK’s use of the competitive dialogue might be the platform for
perfecting a process that seems ideally suited for complex military and weapon systems
procurements
34
Reg. 16(7)(restricted) and Reg. 17(9)(negotiated)
Reg. 16(9)(restricted) and Reg. 17(11)(a)(negotiated)
36
Reg. 16(9)(a)(restricted) and Reg. 17(11)(b)(negotiated)
37
Reg. 18(1) and (2)
38
Observations herein on the competitive procedure and the U.K.’s use of it are based in part on an article by the
Norton Rose law firm, Taking Stock: Competitive Dialogue Four Years On,” in the March 2010 edition of the
Infrastructure Journal.
39
See Office of Government Commerce, January 2006 guidance at
http:///www.ogc.gov.uk/documents/guide_competitive_dialogue.pdf.
40
See Reg. 18(26)(pre-selection) and Reg. 18(27)(post-selection). As the Norton Rose article observes, “…final
tenders may only be ‘clarified, specified, or fine-tuned,’ provided that this process does not involve changes to the
basic features of the tender or call for tender, variations in which are likely to distort competition or have a
discriminatory effect.” As to the winner, it may “clarify” and “confirm commitments,” after its selection, but as
Norton Rose observes, the “linguistic tensions” in the wording of the rules (i.e., clarify, specify, fine-tune, confirm)
leave too much room for unfair “manoeuvre.”
41
Reg. 18(29)
35
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Remedies. As to a contract that has been improperly awarded, the traditional remedy in Europe
for a vendor that has been wrongly denied the award of a contract in favour of another
contractor, was only “damages,” and the offending Contracting Authority might have been
assessed a penalty. However, the EU Remedies Directives,42 which were transposed into the UK
PCR,43 expanded the scope of remedies to include having the improperly awarded contract
voided, or declared “ineffective.”44 This form of remedy caused some debate in the UK,45 but it
was transposed into the Amended PCR.46 This is not to say that all is settled regarding remedies.
Just a month after the Amended PCR became effective, the European Court of Justice overturned
the UK’s implementation of the (old) EU Remedies Directive in Uniplex (UK) Limited v.
National Health Service Business Servo.47 The problem in Uniplex, as it was in a companion
case out of the Irish Republic released that same day,48 was that the rules were unclear as to
when the period commenced from which an aggrieved vendor had to initiate complaint
proceedings. As a result, the UK, and perhaps other nations, will be modifying its remedies rules
to make that period more specific.49 Remedies may be a significant factor in U.K. procurement
in that it appears the private sector is becoming more litigious towards UK Contracting
Authorities.50
The Defence Acquisition Workforce. The workforce responsible for the procurement of new
equipment traditionally has had three career streams, dealing with engineering (which required
an appropriate university degree), finance and contracting/commercial. There is ongoing debate
about whether the DE&S has sufficient technical expertise inside the organisation and what is
required of someone with commercial expertise in dealing with industry as opposed to
knowledge of MoD contracting in isolation. In the support area, there are other specialties
including supply chain and inventory management. These two workforces have now been joined
together and have access to an extensive set of training courses (many of them are on-line) to
develop their knowledge and skills. Senior authorities in the DE&S believe that, with more
training and multi-skilling, the DE&S could operate with fewer than the 20,000 personnel which
was its target in 2010. This is significantly less than half the number of people employed in
defence and support in 1998.
Logistical Support
42
EU Directive 2007/66/EC, which amended Directives 89/665/EC and 92/13/EC.
Statutory Instrument No. 2992, The Public Contracts (Amendment) Regulations 2009, 20 December 2009
44
The remedies that are available to correct errors in the procurement prior to the award of the contract are fairly
well-understood and routine in the EU Member States and the non-EU nations that model their procedures after the
EU.
45
S. Roe and D. Harvey, United Kingdom, Public Procurement, Global Competition Review (London 2009), at ¶27
p. 250. Note, however, that the remedies that are available to correct errors in the procurement prior to the award of
the contract are fairly well-understood and routine in the EU Member States and the non-EU nations that model their
procedures after the EU
46
PCR 47
47
Case C-406/08, 28 January 2010
48
European Commission v. Ireland, Case C-456/08, 31 January 2010
49
The legally defective language in Uniplex is the same as in the current Amended PCR at Reg. 47D(2), and
therefore the UK will have to revise it remedies procedures accordingly.
50
S. Roe and D. Harvey, United Kingdom, Public Procurement, Global Competition Review (London 2009), at ¶42
p. 250.
43
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Prior to 1999, support for equipment was the responsibility of organisations within each
individual service, but as a result of the Strategic Defence Review of 1997-8 a single body, the
Defence Logistics Organisation, was created to support equipment across defence. Significant
savings were anticipated in areas such as storage and transport and the procurement of common
items and the creation of the DLO resulted in the rationalisation of sites. There had always been
a concern, however, that project teams handling the purchase of new equipment in the then
separate Defence Procurement Agency might be tempted to neglect in-service considerations and
preparations, and in 2007 a single Defence Equipment & Support organisation was set up to
handle both new procurement and in-service support.
This involved significant staff relocations and the focussing of activity on the Abbey Wood site
in the north of Bristol. It also meant the merging of bodies with two rather different cultures and
concerns, with procurement people concerned with high technology and project management and
the much more numerous support people oriented towards operations management, inventory
management and supply chains. However, the perceived success is such that there is little or no
debate about any future separation of the two closely-related functions. As noted, Abbey Wood
project teams today look after both new procurement and the support of in-service items. Early
and continuous consideration of support is a feature of the UK acquisition system as a whole.
Like other states, the UK has concerns about the quality and preparation of its acquisition
workforce. A wide range of training programmes are available, but participants on most are not
assessed and the UK has struggled to agree on the academic or professional qualifications
necessary for an individual to take up a post. The professional legal, economic/accounting and
engineering qualifications and workforce streams that are so apparent in the German BWB are
absent in the UK. In the commercial/contracting area, licensing of the individual so that he/she
can sign contracts is largely based on demonstrated experience. The UK civil service (but not
the military) does not have a training margin, that is, there is no assumption that staff will spend
some of their time being trained and/or educated. Most common is a basic professional
qualification in project management through membership of the UK-based Association of
Project Management. A very limited number are taking up the opportunity to study on a parttime basis for Cranfield University Masters degrees at the Defence Academy of the UK51 and
more than a 100 military students a year take the shorter but Master’s level Acquisition
Employment Training course.
A key aspect of the UK approach to support has been a growing readiness to outsource more and
more work to industry. This has been on the basis that industry can often be expected to be more
efficient than the public sector, but there is a important consideration regarding incentives. If
industry is made responsible only for the supply of parts, its routes to profit are through pricing
and the appetite of the equipment for maintenance and repair. In short, industry has an interest in
producing unreliable equipment.
The UK has therefore moved to making industry responsible for more repair activities and has
introduced a large number of availability contracts, under which the contractor commits to
51
The most directly relevant degrees focus on Defence Acquisition Management, Project & Programme
Management and Systems Engineering.
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making a given number of systems available for military use at specified periods of time.
Clearly provision has to be made both for availability for training, where the user needs are
relatively predictable, and for operations, where the user needs are greater but also harder to
predict. Contracting for availability is carried forward through mixed MoD-industry teams that
work at a common location, and of course it can work at the sub-system as well as the platform
level. Partnering is a central guide to attitudes and behaviour in these arrangements. The
National Audit Office took a close look at the impact of availability contracting for the Harrier
and Tornado combat aircraft, in each case recognising real improvements on a number of support
performance metrics52.
Having undertaken a number of intense and in some cases prolonged operations in a wide range
of locations after 1990, the UK MoD gradually recognised that such operations would not be
possible without reliable access to an industrial base willing and able to make timely and
enhanced effort to accelerate the development and even production of some items, modify
existing equipment, and even to generate innovations to facilitate dealing with adversaries. The
UK’s Defence Industrial Strategy White Paper, published in 2005, reflected these considerations.
It found that, in order for the UK to enjoy what in 2010 is often referred to as “operational
sovereignty,” UK industry should be able to “sustain and modify” equipment in the UK
inventory. As was recognised, this would require significant technology transfer in some cases,
and on occasions this has proved difficult if not impossible to arrange. On at least one occasion,
however, when the General Dynamics Piranha was chosen as an armoured army utility vehicle,
the project was abandoned because the required technology would not be transferred to the UK
by GD. It remains to be seen how insistent the UK will prove to be with regard to its “sustain
and modify” aspiration and the planned UK purchase of the Joint Strike Fighter has been much
discussed in this regard.
Safety assurance and acceptance constitutes a related area of potential difficulty with regard to
aspirations for autonomy and requirements for technology transfer. Traditionally, the UK tests
and satisfies itself of the safety of its defence equipment before introducing it into service.
However, certifying something as acceptably safe, with risk as low as reasonably practical
(ALARP), requires a detailed understanding of how that system works. In at least one case, the
UK was unable to obtain from the US manufacturer the source codes needed to verify that a
particular model of helicopter was safe once some UK modifications had been made. Despite a
helicopter shortage, the helicopters remained in storage for years and the UK eventually paid to
have them rebuilt in a more basic but accessible form53. After the crash of a Nimrod aircraft in
2006, and a subsequent report which was highly critical of both industry and the MoD, the
importance of safety assurance was underlined54. It remains to be seen how the issue will be
addressed in the case of imported equipment.
52
Auditor & Comptroller General, Ministry of Defence: Transforming logistics support for fast jets, London,
HMSO, 17 July 2007
53
Report of the Auditor & Comptroller General, Ministry of Defence: Chinook Mk 3 Helicopters, London, HMSO,
4 June 2008, http://www.nao.org.uk/publications/0708/chinook_mk3_helicopters.aspx
54
Charles Haddon Cave QC, Independent Review into the broader issues surrounding the loss of the RAF Nimrod
MR2 aircraft XV230 in Afghanistan 2006, http://www.nimrod-review.org.uk/documents.htm
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From Kit to Capability
Particularly through its experiences with the Apache helicopter and the Bowman communication
system, both of which involved significant change for the UK’s forces, the MoD concluded that
it needed a conceptual framework and a management system initially to ensure that new
equipment would have all the other elements available at the right time to ensure that the
equipment could be used effectively on operations.
The conceptual framework that was eventually accepted is known by the acronym TEPIDOIL,
which stands for Training (individual and collective), Equipment, People, Infrastructure,
Doctrine, Organisation, Information and Logistics. These elements, which are known as
Defence Lines of Development (DLoDs), are recognised as basic building blocks of capability
which need to be generated and delivered in a coordinated way. This is slightly different but
similar in many ways to the Australian conceptual framework of Fundamental Inputs to
Capability and the American DOTMLPF structure.
The TEPIDOIL framework is intrinsic to the idea that the UK seeks to maintain a holistic view
of acquisition from the beginning of a project through to its retirement from service and possible
replacement. The formal label attached to this idea is Through-Life Capability Management,
which in my ways is a slightly inappropriate title. The “Life” of interest is generally thought to
be that of the equipment, i.e. TLCM implies an equipment-centric view of capability. Other UK
thinking, however, stresses that capability should be enduring (until it is no longer needed) and
that individual DLoDs have their own lives. A set of TLCM processes have emerged to cover
capability definition, planning, delivery and use and these are reasonably well-defined, especially
for the early stages i.e. definition and planning.
The UK works to use the TEPIDOIL and TLCM frameworks both at the project level and at the
programme (groups of projects) level in an effort to optimise the delivery of capability. The
programme level represents since 2008 a new level of management ambition in the MoD, in
which groups of equipment projects, in a broad area of capability, with all their DLoDs are
viewed together. The intention is to develop a capacity to trade individual DLoDs off against
each other to yield the optimum mix. For instance, as a surveillance project proceeds, it might be
concluded to accept less capable technology which can be offset by increased training in image
interpretation. Managing all lines of development within and across equipment projects is a
complicated business and it is by no means certain that it will be feasible. The MoD itself has
recognised that a simpler version of TLCM might be needed. The information and data demands
alone are significant. The ambition of the UK is, however, apparent, and undoubtedly the
programme approach will work more easily in some areas than others.
Disposal
Disposal is a specified section in the UK acquisition cycle, representing either an opportunity or
a cost. It is the responsibility of the DE&S. In the area of opportunity, the UK has been able to
sell a number of its older but refurbished warships to foreign navies over the years. In the area of
notable cost, the UK’s nuclear systems present obvious problems and a (discounted) provision
for the future costs of dealing is included as a liability on the MoD’s balance sheet.
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Defence Industrial Policy
As noted briefly above, the UK has had a formal policy towards UK defence industry for some
time. In 2002 the MoD published a Defence Industrial Policy, whose most important feature was
a commitment to treat any defence firm that added significant value in the UK as British. The
location of the firm’s ownership was to be of no consequence. Given their number of employees
in the UK, Raytheon, Thales, Lockheed Martin and Finmeccanica were among those seen as
“British” companies. In 2005 the British Government released the Defence Industrial Strategy
which spelled out the (limited number of) areas where the UK was seen to need an indigenous
capability. These were essentially areas of great sensitivity where the UK could not be confident
of being able to buy top quality (or even any) equipment from overseas. Ambitions for a wide
range of different sectors were spelled out, although the costs of meeting these ambitions were
not specifically addressed. Some important progress was made in the implementation of DIS,
including the formation of the government-industry Team Complex Weapons, which proved a
challenge in the light of UK competition law, the conclusion of support agreements to secure the
immediate future for the fixed wing combat and helicopter industries, and the consolidation of
submarine and surface ship construction industry into BAES. Further refinement of the DIS
could not be concluded before the 2010 general election.
Summary Remarks
The UK has sought constantly to improve its defence acquisition system and has been
remarkably thorough in identifying the challenges involved. It has also, however, struggled to
implement the measures put in place to mitigate problems, perhaps because of the complexity of
the sets of tasks to be undertaken in a government that frequently expects to develop its own
equipment rather than buy something that has already been developed for another government.
In setting price, cost and performance targets for items of equipment, often before adequate risk
reduction has taken place, the UK MoD could be seen as often setting itself up for failure when
in fact something different may have occurred. When a project goes over budget, the press and
the NAO normally conclude that money has been “wasted” whereas in fact the target may never
have been feasible and a cheaper alternative may not exist. The late and over-budget Astute
submarine, for instance, is understood to cost less than a US or French nuclear submarine, as will
the UK’s next aircraft carriers (if they are completed).
One strongpoint of the UK approach is the attempt to provide a holistic picture to those
participating in defence acquisition through the CADMID, TEPIDOIL and TLCM and
programme management constructs. These do not guarantee that people will not behave in a
stove-piped manner where they take account only of their own particular role, but they do
encourage a broader perspective. The MoD may struggle to generate all the accurate information
needed to make TLCM, but if those planning finance or managing inventory recognise that they
are part of the wider picture of capability management, they must do their jobs in the light of the
needs and roles of others.
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Change, or attempted change, seems set to continue in UK defence acquisition, not least because
a significant reduction in the Equipment Procurement programme will probably be needed by
2011, but also because there will be a need to halt or at least slow the trend of equipment costs
becoming higher in unexpected as well as scheduled ways as procurement moves from one
generation to the next.
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PART III
Appendices A and B
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Defence Acquisition- Resource Management Systems
Comparative Assessment 2010
APPENDIX A
2009 Overview: European Union Defence Procurement Directive 2009/81/EC
The 2009 European Union’s Defence Directive. The EU’s “Defence Directive,”1 is the
keystone of the European Commission’s efforts to open the defence procurement of
European Union Member States to more competition – at least within the EU, if not
beyond the EU. The Directive serves as the basis from which EU Member States will
conduct the defence contracting that falls under the Directive’s jurisdiction, and from
which a Member State does not “derogate” from the Directive under the authority of
Article 296/346 of the EU Treaty (discussed below).
The Significance of the EU Defence Directive to the IDARM Comparative
Assessment of Defence Acquisition. Under EU law, its Member States are required to
abide by the EU Procurement Directives, and to assimilate (“transpose”) the requirements
of the Directives into their national procurement rules. In the case of the Defence
Directive, this transposition must be completed by August 2011. Four of the countries
studied in the Comparative Assessment (the United Kingdom, Germany, Poland, and the
Czech Republic) are EU Members, and three other non- EU nations (Croatia,2 Albania,
Moldova) have procurement rules and procedures that are already similar to the EU
Procurement Directives, and it is therefore anticipated that the 2009 EU Defence
Directive will significantly influence their defence procurement.3
Article 296 of the European Union Treaty and EU Defence Procurement. Prior to
the 2009 Defence Directive, all European Union public procurement, to include defence
procurement, fell under the requirement of either the EU Utilities Procurement Directive
2004/17/EC, or (more commonly for defence procurement), the Public, or General,
Procurement Directive 2004/18/EC, whose Article 10 made it applicable to defence
procurement. However, EU Member States frequently, if not automatically, invoked
Article 296 of the EU Treaty to exclude their defence contracting from the EU
1
Directive 2009/81/EC of the European Parliament and Council 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 Field of Defence and Security, and
Amending Directives 2004/17/EC and 2004/18/EC. The English text of the Defence Directive is
available at: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:216:0076:0136:EN:PDF
2
Croatia, which is an applicant for EU membership, has, in effect, already transposed the EU Defence
Directive into its national rules in the January 2010 version of its procurement rules.
3
The procurement rules of the eighth nation studied by the Comparative Assessment, Ukraine, are based
on the United Nations’ Commission on International Trade Law (UNCITRAL)’s Model Rules on the
Procurement of Goods, Construction and Services, with Guide to Enactment -which is very similar in
several respects to the EU Procurement Directives.
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Procurement Directives, and the transparency and competition it required in public
procurement. Article 296 provides:
Article 296 (now 346) TEC4
1. The provisions of the Treaties shall not preclude the application of the
following rules:
(a). No Member State shall be obliged to supply information, the
disclosure of which it considers contrary to the essential interests of its
security;
(b). any Member State may take such measures as it considers
necessary for the protection of the essential interests of its security which
are connected with the production of, or trade in, arms, munitions, and war
material; such measures shall not adversely affect the conditions of
competition in the internal market regarding products which are not
intended for specifically intended for military purposes.
2. The Council may, acting unanimously on a proposal from the
Commission, make changes to the list, which it drew up on 15 April 1958,
of the products to which the provisions of paragraph 1(b) apply.5
The reason Member States routinely advanced for invoking Article 296 was that the EU
Procurement Directives were ill-suited for procurement in the defence and security
environments. The European Commission became concerned that defence-related
exemptions were being applied in many unjustified circumstances, and that this was
detracting from the European Union’s ability to establish an EU-wide base of dependable
defence suppliers. The Commission began infringement proceedings against Member
States, and the European Court of Justice found in more than a few instances that the
reasons advanced for “derogating” from the EU Directives under the authority of Article
296 were legally insufficient. While the European Defence Agency (established in 2004)
attempted to open up the EU defence market for procurement exempted under Article
296, it had little success. Finally, the Commission promulgated the Defence Directive,
effective August 2009.
4
Article 296 is now Article 346, based on the renumbering of Articles by the Treaty of Lisbon (Treaty of
Lisbon, 13 December 2007, Amending the Treaty on European Union and to the Treaty Establishing the
European Community). The Treaty entered into force on 1 December 2009. A comprehensive cross
reference of the numbering changes effected by the Treaty of Lisbon is at
http://ec.europa.eu/competition/information/treaty.html
5
In 1958 the Council of the European Union listed the items that are subject to Article 296. That list is
still in force, and obviously includes major weapons systems such as ships, aircraft, armor and artillery.
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Security Features of the Defence Directive. The Defence Directive is an extremely
definitive effort to establish a credible regime specifically for defence procurement, and
from which derogation under Article 296 will be difficult to justify because the Directive
affords Member States explicit and extensive authority to impose security measures in
their contracting procedures, and to make the ability to comply with those provisions a
condition of contract award and performance. Therefore, while Article 296 is still in
force, the Directive should reduce the incidences of its application. As the introductory
Coordinating Provisions of the Directive state:
Given the sensitive nature of defence and security sectors, the reliability of
economic operators to which contracts are awarded is vital. This
reliability depends, in particular, on their ability to respond to
requirements imposed by the Contracting Authority/Entity with respect to
security of supply and security of information. In addition, nothing in this
Directive should prevent a Contracting Authority/Entity from excluding an
economic operator at any point in the process for the award of a contract if
the Contracting Authority/Entity has information that to award all or any
part of the contract to that operator could cause a risk to the essential
security interests of that Member States….these requirements are
particularly important given the sensitive nature of the equipment covered
by the Directive, and concern the whole of the supply chain.
● Security Clearances and Certifications. The Defence Directive provides that, in
the absence of harmonization (standardization) of security standards and clearances at the
European Community level, Member States may apply their own national security
requirements, but should accept, if comparable to their own, the standards and clearances
of other nations.
● Treatment of Classified Information by Contractors. One of the important
features of the Directive is the authority it provides for conditioning the award of defence
contracts on the security qualifications of contractors and subcontractors at all phases of
the procurement. Article 7 of the Directive provides:
Contracting Authorities/entities may impose on economic operators
requirements aimed at protecting classified information they communicate
throughout the tendering and contracting procedure. They may also
request economic Operators to ensure compliance with such requirements
by their subcontractors.
● Security of Information. The Directive provides that if a contract involves
classified information, the Contracting Authority may require commitments or other
proof from tenderers that they and their subcontractors can appropriately handle and
safeguard classified information at all times – including in the tendering and post-contract
phase.
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● Security of Supply. Security of supply involves a variety of requirements,
including internal rules between subsidiaries and the parent companies regarding
intellectual property rights, and critical service and maintenance capabilities to ensure
support over the life cycle of equipment. The Member States may require proof of a
tenderer’s ability to effect security, including not only physical security in storage and
transit, but also matters such as compliance with export control requirements, and the
ability of contractors’ supply chains to satisfy their obligations under crisis situations, and
to effect maintenance, modification, or modernization of the supplies, as well as to
provide spare parts, testing equipment, drawings, etc. In this regard, the Directive
sanctions the Contracting Authority requesting the national authorities of foreign
contractors to report on the security status of the candidate/tenderer’s facilities and
personnel, and also on its clearances and ability to manage sensitive information.
The Applicability of Defence Directive
● Covered Purchases. The Defence Directive applies to contracts and framework
agreements for military equipment, including any parts, components and/or
subassemblies thereof; sensitive equipment, including any parts, components and/or
subassemblies thereof; works, supplies, and services directly related to military and
sensitive equipment for any and all elements of its life cycle; and works and services
specifically for military purposes or sensitive works and sensitive services. The threshold
for Directive applicability is €412,000 for supply and service contracts, and €5,150,000
for works contracts.
● Contracts Involving National Security.
These are contracts involving
information, the release of which would be “contrary to the essential interests of security”
– this is the language of exemption under Article 296. As the Directive’s Coordinating
Provisions point out, Article 296 of the Treaty makes provision for this exemption, and It therefore follows that none of the provisions of this Directive should
prevent the imposition or application of any measure considered necessary
to safeguard interests recognized as legitimate by these provisions of the
Treaty.
This means that in particular the award of contracts which fall within the
field of application of this Directive can be exempted from the latter where
there is justified on grounds of public security or necessary for the
protection of essential security interests of a Member State. This can be
the case for contracts in the fields of both defence and security which
necessitate such extremely demanding security of supply requirements or
which are so confidential and/or important for national sovereignty that
even the specific provisions of this Directive are not sufficient to
safeguard Member States’ essential security interests, the definition of
which is the sole responsibility of the Member States.
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However, the Directive also states:
Nevertheless, in accordance with the case law of the Court of Justice of
the European Communities, the possibility of recourse to such exemptions
should be interpreted in such a way that their effects do not extend beyond
that which is strictly necessary for the protection of the legitimate interests
that those Articles help to safeguard. Thus, the non-application of this
Directive must be proportionate to the aims pursued, and cause as little
disturbance as possible to the free movement of goods and the freedom to
provide services.
The Directive’s example of contracts that could remain to exemption under Article 296
are contracts “so sensitive that their very existence must be kept secret.” (emphasis
added)
Contracts Excluded from the Defence Directive. In addition to contracts that are
exempted by a Member State under the authority of Article 296, the Directive excludes it
coverage for contracts governed by international agreements, contracts for intelligence
purposes, contracts to carry out a Member State’s cooperative programs, contracts that a
Member State awards in a third country, government-to-government contracts, certain
research and development services, realty transactions, arbitration and conciliation
services, financial services (except insurance transactions), and contracts of employment.
Contracting Features and Processes of the Defence Directive
Notice of a Member State’s Contracting Activities. There are basically four types of
notice in EU procurement, three public and one internal to the actual competitors. These
are notices that give notice of planned contract opportunities; notices of actual contract
opportunities; internal notice to the competitors of the winning and non-selected
participants; and public notices of actual contract awards.
Specifications. The Defence Directive permits the practice of a “technical dialogue”
during which industry is solicited for comments and suggestions on requirements and
specifications - as long as that does not result in an unfair advantage to any contractor.
The Directive sets standards regarding technical specifications, and sanctions the
prioritized application of internationally-recognized technical specifications, but it favors
the use of performance specifications, based on functional requirements, whenever
possible.
Award Criteria. There are two criteria, lowest price and most economically
advantageous, which is the standard most often used in defence procurement. In the case
of the most economically advantageous tender, the Directive cites, in addition to price,
criteria such as quality, technical merit, functional and environmental characteristics,
running and life cycle costs, cost-effectiveness, after-sales service and technical
assistance, delivery date and period of completion, security of supply, interoperability,
and operational characteristics. The Contracting Authority is required to provide the
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relative weighting of the criteria in the notice documents, or, if weighting is impractical,
the descending order of importance for the criteria.
Contracting Procedures. The Directive recognizes four contracting procedures:
Restricted Procedures, Negotiated Procedures with and without Publication of a Contract
Notice, and the “Competitive Dialogue.” The number of candidates and tenderers the
Contracting Authority/Entity will engage in these procedures can be limited by the
Contracting Authority/Entity at the outset, and that number can be reduced as the
negotiation and tendering process to the eventual selection of the contractor.
● Restricted Procedures. In this procedure, any economic operator (contractor) may
request to tender in response to the Contracting Authority’s notice of a contracting
opportunity. Those who do are “candidates,” and they are selected by the Contracting
Authority to submit tenders. The Restricted Procedure in the EU is characterized by the
absence of negotiating with the tenderers, and it therefore is often not the best procedure
for complex defence purchases.
● Negotiated Procedures with Publication of a Contract Notice. In this procedure,
any economic operator can request to participate, and the Contracting Authority selects
the candidates to tender, during which process the parties negotiate in order to arrive at
tenders that satisfy the contract requirements, and from which the Contracting Authority
will select the best tender in accordance with the announced award criteria.
● Competitive Dialogue. The Competitive Dialogue is reserved for cases where the
solution to the requirement is not clear, and no other procedure is adequate. The
Competitive Dialogue process commences with a notice setting forth the Member State’s
needs and requirements, as best as they can be defined. Candidates who satisfy the basic
qualification standards are selected and invited to dialogue with the Contracting
Authority regarding the best way to satisfy the requirement, with consideration that the
contract award will be made to the most economically advantageous tenderer. As the
dialogue continues, the parties address price and payment issues, as well as the technical
aspects of the proposal, until the Contracting Authority identifies the solution, or
solutions that are likely to satisfy the government’s needs.” (emphasis added – different
solutions can compete). At this point, the Contracting Authority asks for final tenders,
which must meet all the elements in order to satisfy the requirement.
● Negotiated Procedure Without Publication of a Contract Notice. This
procedure involves little or no competition, and the Defence Directive gives detailed
guidance as to when this procedure may be used, and its use must be justified in the
public notice of the actual contract award.
The circumstances that permit the use of this procedure are as follow:
► After Failed Competition. The procedure may be used when there were no
tenders/applications, or no suitable (or legally-acceptable) tenders/applications, submitted
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under one of the other procedures. However the procedure must be for a purchase that is
substantially the same as that sought under the unsuccessful competition.
► Crises and Urgency.. The procedure may be used when the time periods
required for the other procedures are incompatible with the urgency of a crisis or other
unforeseen urgency.
► Technical Necessity or Technical Value. The procedure may be used in cases
where only one source is technically capable or has the proprietary ability to execute the
contract. It may also be used to maintain supply from a source which, if replaced with
another vendor, would result in systemic incompatibilities, or result in “disproportionate
technical difficulties in operation and maintenance.”
► Certain Research and Development Contracts. The procedure is available
for research and development contracts that are covered by the Directive where the
products are manufactured purely for research and development (i.e., not for purposes of
establishing commercial viability or to recover research and development costs).
► Commodity Market Purchases. The procedure may be used when purchasing
from vendors on an established commodity market.
► Singularly Advantageous Terms. The procedure may be used where
favorable terms can be obtained from vendors that are “definitely” winding up business
(i.e., going out of business), or from liquidators, creditors, etc.
► Unforeseen Needs to Modify the Original Contract. Where there is an
unforeseen need for additional works or services, this non-competitive procedure may be
used to amend or make another award to the original contractor if the additional effort
cannot be technically or economically separated from the original award without major
inconvenience to the Contracting Authority, or when such works or services, although
separable from the original contract, are “strictly necessary for its completion.” When
this authority is invoked, the aggregate value of the additional contracts cannot exceed
50% of the original contract.
► Possible Additional Orders (i.e., Options) Previously Competed. If the
possibility of additional orders is announced in the original contract notice, the
Contracting Authority may order additional works or services without notice during a
period not to exceed five years after the end of the original contract period.
► Air or Maritime Transport for Deploying Forces. The procedure is
available to procure short-term air or maritime services for military or security forces
deploying outside the Member State, and the lead-time requirements of the other
procedures are incompatible with the urgency.
Other Procurement Solutions. The following are ways or techniques that are
recognized by the Directive for obtaining or structuring or managing contract support.
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● Framework Agreements. A framework agreement is an agreement - not an actual
contract - between a Contracting Authority and one or more candidates, after a
competitive procedure. The agreement addresses all or most of the terms that will govern
subsequent contract orders that might awarded by the Contracting Authority. However, a
framework agreement does not obligate the Contracting Authority to “place an order,”
“make a call,” or award a contract against the agreement.
● Electronic Auctions. This process can be used during an established procedure for
competition over portions of the requirement that are capable of objective quantification.
While price would satisfy this standard when using a “lowest price” criteria, an auction
could be used for non-price items such as the length of warranty. Auctions have to insure
security over tenderer’s information; allow tenderers to gauge their standing during the
successive auction rounds; and employ commercial software and hardware that is
commonly available to contractors.
● Central Purchasing Bodies. A Central Purchasing Body is a Contracting
Authority that makes contracts for other Contracting Authorities, or that awards contracts
from which other Contracting Authorities can place orders. Purchases properly made
from or through a Central Purchasing Body are deemed to be compliant with the Defence
Directive.
Evaluation of Candidates and Tenders. The overall scheme of evaluation of the
participants in a contract or framework action begins with a determination as to whether
they should be excluded, and whether they have the necessary technical abilities. This
involves determining if the candidate/tenderer has the requisite minimum capacity of
financial and technical resources, which may include quality control and environmental
management standards. Submissions from candidates or tenderers on these matters are
subject to the Contracting Authority’s requests for clarification or additional information.
The Defence Directive recognizes Member States’ official lists of approved contractors.
This certification is a presumption of qualification, which cannot be questioned by the
Contracting Authority without reason. Contractors may be excluded from the
competition for award because of convictions of criminal conduct (mandatory exclusion),
and (permissive) exclusion for matters such as bankruptcy, offenses against professional
conduct or obligations such as, for example, infringements of legislation concerning
export licensing requirements; “grave professional misconduct,” such as non-compliance
with security obligations in a previous contract; that the contractor poses a security risk;
has failed to meet payment obligations for social insurances and taxes; or has made
“serious misrepresentations” in supplying information regarding its status and conduct.
The Directive provides that these exclusions can be based on any available information,
to include information from protected sources.
Evaluation Topics
Confidentiality of Information Submitted by Economic Operators. Contracting
Authorities, in conformity with their national law, are required to control access to, and
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secure, information designated by economic operators as confidential, e.g., information
that constitutes a trade secret or other proprietary data.
Variant Proposals. Where the standard for contractor selection is “most economically
advantageous,” Contracting Authorities may permit variant proposals. The acceptance of
such proposals has to be announced in the request for tenders as well as the minimum
factors that would make a variant tender acceptable. Only variant tenders that satisfy the
stipulated criteria can be taken into consideration.
Abnormally Low-Priced Tenders. If the Contracting Authority believes that a
proposed price is “abnormally low,” which is not defined in the Directive, that low tender
cannot be rejected without affording the tenderer an opportunity to explain its pricing.
The Contracting Authority is required to verify the proferred reasons for the low price,
and, in the case of a low price because of state aid, the burden is on the tenderer to
demonstrate that such aid is lawful. In the case where a tender is rejected because of
illegal state aide, the Contracting Authority is required to notify the Commission.
Contractor Selection, Notice to Competitors, and the “Standstill” Period
Notice to the Competitors of the Contracting Authority Decisions. Upon reaching a
decision to make an award of a contract or a framework agreement (or not to make any
award, or to recommence a re-procedure), the Directive requires the Contracting
Authority to advise candidates/tenderers of those decisions. The Contracting Authority
must provide a summary of the reasons for the decision, but may limit the content of the
summary to withhold information that might impede law enforcement, be contrary to
public interest, jeopardize defence or national security, or prejudice the legitimate
commercial interests of a private party. This notice must also contain an explanation of
the operation and duration of the standstill period rules of the Member State.
The Standstill Period. A contract subject to the Directive cannot be awarded
(“concluded”) unless it has been preceded by at least 10 days of advance notice (15 days
if notice is sent by mail) to the tenderers or candidates who are not going to be selected.
This period allows those who believe there has been a violation of the rules to seek
review (discussed below).
“De-Briefing.” An unsuccessful candidate or tenderer may request the Contracting
Authority to advise it of the reasons for its non-selection (this is in addition to the
information provided in the notice of non-selection). The Contracting Authority must
provide the reasons for non-selection and the characteristics and relative advantages of
the tender selected. Of note, one of the reasons cited for possible non-selection is the
tenderer’s failure to satisfy the security requirements for information and supply. As in
the case of the initial internal notice, information may be withheld in the debriefing at the
discretion of the Contracting Authority, if its release might impede law enforcement,
jeopardize defence or national security, be contrary to public interest, or prejudice the
legitimate interests of other contractors.
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Subcontracting
Principles of Subcontracting. The award of a subcontract does not reduce the prime
contractor’s sole liability to the Member State or the prime contractor’s responsibility for
the performance of the contract. Prime contractors are free to select their own
subcontractors, but must treat all potential subcontractors in an equal and nondiscriminatory manner. A subcontracting plan that has been approved by the Contracting
Authority becomes a contractual obligation of the prime contractor. The Contracting
Authority may ask (or be required by national law to ask) tenderers to indicate in their
tender whether they intend to subcontract, and, if so, the share of the work to be
subcontracted, the nature of the work to be subcontracted, and the identity of any
proposed subcontractor. The contractor can also be required to report changes to its
subcontracting plans that occur during contract performance. The Contracting Authority
can also require tenderers to impose (flow down) specified requirements on their
subcontractors. If the Member State reserves the right to approve a subcontractor, a
proposed subcontractor cannot be rejected except on the same bases as are applied to
tenderers, and the Contracting Authority must provide the tenderer (prime contractor)
with written reasons for the rejection of its proposed subcontractor.
Required Subcontracting.
Member States may require subcontracting.
If
subcontracting is required, this is to be clearly set forth in the contract notice, together
with the required range of subcontracting in terms of minimum and maximum, with the
maximum not to exceed 30% of the value of the contract. Such a requirement, if
imposed, must be consistent with the object, value, and practice of the industry. If
subcontracting is required, the Contracting Authority may require tenderers to propose
what parts of the work they will subcontract, and any approved subcontracting is applied
towards the satisfaction of the mandated percentage of subcontracting. Tenderers may
propose to exceed the required percentage of subcontracting, and if so, the tenderer can
be required to state the work it intends to subcontract. The Directive recognizes that it
may be impractical to conduct a competition for subcontractors before a contractor
actually has an award, and therefore “proposed” subcontractors are acceptable for
purposes of tendering, but that does not eliminate the requirement for competition in the
eventual subcontracting process. A contractor may be absolved from mandatory
subcontracting if it demonstrates to the satisfaction of the Contracting Authority that none
of the vendors in the subcontract competition would be capable of satisfactorily executing
the proposed subcontracting effort.
Challenges to, and Reviews of, Contract Actions and Remedies for Infringements
Reviews and Remedies. A review is an examination of the Contracting Authority’s
decisions in response to a challenge by a contractor who feels the Contracting Authority
is acting improperly. The review results in a decision and, if there has been an error,
corrective action – the remedy. The remedy can be a correction (such as amending an
unduly restrictive specification), or a payment to a contractor who has been wrongly
deprived of a contract or a contract opportunity, or even the monetary punishment of the
offending Contracting Authority. While the European Union has a Remedies Directive
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for procurement under the Public and Utilities Directives, the Defence Directive provides
its own remedies authority, which rests on the foundations of the other EU Remedies
Directives. In addition to correcting errors in the procurement process, the Defence
Directive contains a regime for the review and response to an infringement claim based
on the improper application of Article 296, and would place the burden on the Member
State claiming Article 296 to demonstrate that the use of Defence Directive procedures
would be inadequate to protect the Member’s security interests.
● Review Procedures. The Directive sets criteria for national review procedures to
insure that Contracting Authority actions can be reviewed promptly and effectively upon
a challenge by an aggrieved contractor. Entities that have an interest in obtaining a
contract, and who are at risk of being harmed by an alleged infringement may apply for
review. Member States must ensure the security of sensitive and proprietary information
that is placed into the review process, and for that reason may assign review duties to a
specialized body. A timely request for review results in a suspension of the contracting
process while the review is being conducted. Member States can require that the review
process begin with the Contracting Authority, but that the final decision must be at a level
other than, and independent of, the Contracting Authority, and those with review
authority must be able to require corrective actions and impose remedies such as setting
aside improper contracts (ineffectiveness) and awarding damages to a person who has
been harmed by an infringement. In fashioning remedies and other powers on review, the
Directive requires that Member States give their review authorities the power to impose
remedies that be “effectively enforced” under the Member State’s laws. Also, where the
final review authority is not “judicial in character,” the Directive requires that Member
States provide for judicial review of their decisions.6
The “Corrective Mechanism” of the European Commission. Significantly, the
Directive reminds Member States of the authority that the European Commission has to
intervene where there has been a “serious infringement” of the contracting rules.
6
The Directive allows Member States to forgo warranted injunctive, corrective, and penalizing actions if it
is determined that those otherwise appropriate actions should not be taken in the interests of security or
public interest if the “negative consequences could exceed their benefits.” However, a decision not to
impose interim measures does not preclude a contractor’s other remedies.
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Defence Acquisition- Resource Management Systems
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APPENDIX B
EUROPEAN UNION DEFENCE PROCUREMENT DIRECTIVE 2009/81/EC
Section 1
Introduction
A European Community Directive on Defence Contracting, the “Defence Directive”
1:1. Introduction to the Defence Directive. The “Defence Directive,” Directive
2009/81/EC, effective 20 August 2009, is the keystone of the European Commission’s
efforts to open defence procurement by European Union Member States to more
competition – at least within the EU, if not on an international basis. The Defence
Directive serves as the basis from which EU Member States will conduct the defence
contracting that falls under the Directive’s jurisdiction, and from which the Member State
does not “derogate” under the authority of Article 296/346 of the EU Treaty.
1:2. Background. There are two sets of competing views on this subject within the
European Union. One view, by the European Commission, urges more foreign access
and competition in the EU Member State’s defence contracting opportunities; and the
other view, of the individual Member States, is to shelter or reserve defence contracting
opportunities for their national companies.
● The European Commission’s View. The European Commission views European
defence as requiring a strong EU-wide base of resources and suppliers. This requires a
cadre of vibrant sources at the prime, subcontract, and supplier level. This cannot be
achieved if defence contract opportunities are reserved only for the Member State’s
domestic sources.
● Member States’ View. Member States, some more than others, have been
traditionally reluctant to compete their defence contracting opportunities outside of their
own domestic markets. They justify this by citing Article 296 of the Treaty Establishing
the European Community, which permits a Member State to exempt contracts for defence
from the normal procurement processes because of national security concerns (discussed
below). However, it often appears that the Members’ motivation for invoking Article
296 is, in large part, the economic benefit of reserving high-value contracts for domestic
or favored suppliers. In short, the vision of a “one Europe” is not fully embraced by all
the Member States when it comes to national security and domestic economies.
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1:3. Significance of the EU Defence Directive to the IDARM Comparative
Assessment of Defence Acquisition. All EU Member States are required to abide by the
mandatory provisions of the EU Procurement Directives, and to assimilate (“transpose”)
those requirements into their national procurement rules. As to the Defence Directive,
that transposition must be completed by August 2011. Four of the countries studied in
this Comparative Study (the United Kingdom, Germany, Poland, and the Czech
Republic) are EU Members; three other non-EU Members (Croatia, Albania, Moldova)
have procurement rules and procedures that are very similar to the EU Procurement
Directives, and it is therefore anticipated that the 2009 EU Defence Directive will
significantly influence defence procurement in those nations. The procurement rules of
the eighth nation studied by the Comparative Assessment, Ukraine, are based on the
United Nations’ Commission on International Trade Law (UNCITRAL)’s Model Rules
on the Procurement of Goods, Construction and Services, with Guide to Enactment which is very similar in several respects to the EU Procurement Directives.
Section 2
Background: Article 296
2:1. Article 296 (now Article 346) of the Treaty for the Functioning of the European
Union (“TFEU,” formerly the Treaty Establishing the European Community, or EC
Treaty) in European Union Defence Procurement. Article 296 of the Treaty codifies
the principle that Member States are entitled to take measures to protect their security in
connection with the production of, or trade in, arms, munitions, and war material. This
obviously includes contracting for defence items and services.
Article 296 (now 346) TEC1
1. The provisions of the Treaties shall not preclude the application of the
following rules:
(a). No Member State shall be obliged to supply information, the
disclosure of which it considers contrary to the essential interests of its
security;
(b). any Member State may take such measures as it considers
necessary for the protection of the essential interests of its security which
are connected with the production of, or trade in, arms, munitions, and war
material; such measures shall not adversely affect the conditions of
competition in the internal market regarding products which are not
intended for specifically intended for military purposes.
1
Article 296 is now Article 346, based on the renumbering of Articles by the Treaty of Lisbon (Treaty of
Lisbon, 13 December 2007, Amending the Treaty on European Union and to the Treaty Establishing the
European Community). The Treaty entered into force on 1 December 2009. A comprehensive cross
reference of the numbering changes effected by the Treaty of Lisbon is at
http://ec.europa.eu/competition/information/treaty.html
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2. The Council may, acting unanimously on a proposal from the
Commission, make changes to the list, which it drew up on 15 April 1958,
of the products to which the provisions of paragraph 1(b) apply.2
2:2. The Previous EU Procurement Directive for Defence and Article 296. Prior to
the 2009 Defence Directive, all European Union public procurement, to include defence
procurement, fell under the authority of either the Utilities Procurement Directive
2004/17/EC,3 or the Public, or General, Procurement Directive 2004/18/EC,4 whose
Article 10 made it applicable to defence procurement - subject, of course, to the
exemption of Article 296 (as a practical matter, defence procurement would be subject to
2004/18/EC, and seldom to 2004/17/EC). However, Member States frequently, if not
automatically, invoked Article 296 to exclude their defence contracting from the
otherwise applicable EU Procurement Directive. The reasons Member States routinely
advanced for invoking Article 296 were the security nature of defence procurement, and
in that regard, the Procurement Directives were claimed to be ill-suited for procurement
in the defence and security environments. The practice of exempting defence
procurement from the EU Directives resulted in not only a de facto closing of defence
markets – even within the Union - but also in disparate EU national procedures for
defence procurement. The European Commission became concerned that defence-related
exemptions were being applied in many unjustified circumstances, and began to bring
infringement proceedings against Member States, where the European Court of Justice
found in more than a few instances de jure consequences of invoking Article 296.
However, that, and even the European Defence Agency’s attempts at achieving
uniformity in defence procurement through its Code of Conduct on Defence
2
In 1958 the Council of the European Union listed the items that are subject to Article 296. That list is
still in force, and obviously includes major weapons systems such as ships, aircraft, armor and artillery.
3
Directive 2004/17/EC of the European Parliament and of the Council, of 31 March 2004, Coordinating
the Procurement Procedures of Entities Operating in the Water, Energy, Transport and Postal Services
Sectors.
4
Directive 2004/18/EC of the European Parliament and the Council of 31 March 2004 on the Coordination
of Procedures for the Award of Public Works Contracts, Public Supply Contracts, and Public Service
Contracts, OJL/134 of April 30, 2004, p.114.
Other EU/EC Directives affecting procurement are Directive 2005/75/EC of the European Parliament and
of the Council, 16 November 2005, Amending Directive 2004/18/EC, on the Coordination of Procedures
for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts; Directive
89/665/EEC, 21 December 1989, on the Coordination of the Laws, Regulations, and Administrative
Provisions Relating to the Application of Review Procedures to the Award of Public Supply and Public
Works Contracts; Directive 92/13/EEC, 25 February 1992, Coordinating the Laws, Regulations and
Administrative Provisions Relating to the Application of Community Rules on the Procurement Procedures
of Entities Operating in the Water, Energy, Transport and Telecommunications Sectors; Directive
2005/51/EC, 7 September 2005, amending Annex XX to Directive 2004/17/EC and Annex VIII to
Directive 2004/18/EC of the European Parliament and the Council on public procurement.
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Procurement5 were largely ineffective in reducing the application of Article 296 in the
European defence market.
2:3. One View on the Adverse Effects of Article 296. The following summarizes the
mainstream thinking on the adverse effects of Article 296.
How Article 296 is Stopping Competition6
Europe’s defence equipment industry is in no shape to compete
successfully in the global market, or even within the EU. One of the
problems, say British defence experts Derek Marshall and Tim Williams,
is that a loophole in EU rules allows countries to protect their defence
industries from competition.
But while some defence markets in Europe are open to competition – such
as the UK’s – others are not. In some senses opening a defence market to
competition is simply a question of political will, but defenders of
protectionism have a useful weapon in Article 296 of the EC Treaty.
Dating from the 1950s, this allows a member government, for reasons of
national security, to disregard EU procurement rules when buying defence
equipment.
When the European Defence Agency (EDA) was formed in 2004, it tried
to inject competition into the areas of the defence market covered by
Article 296 by introducing transparency, and with it peer pressure, into
procurement. Its Code of Conduct, issued in July 2006, said governments
should publish defence procurement opportunities on EDA’s online
Bulletin Board and contract awards should be made primarily on
economic grounds. The EDA promised regular reports about the
effectiveness of the Code and these indicate that about €10bn of defence
business is now captured by the Bulletin Board….
…Realistically, the EDA’s initiative cannot succeed overnight because the
development of a European defence equipment market will require real
changes in thinking at the national level, and no doubt brave political
decisions. The difficulties are compounded by the fact that there is still a
reluctance among European governments – in contrast to the US - to give
defence spending priority over other areas of the budget. But the EDA
5
Discussed in Section 4 to this Part III
6
How Article 296 is Stopping Competition, Europe’s World, Spring 2008. Available at
atetilhttp://www.europesworld.org/NewEnglish/Home_old/Article/tabid/191/ArticleType/articleview/Articl
eID/21142/Default.aspx
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recognises that the changes might take time, and industry has been
supportive of its efforts.
The European Commission has been taking a close interest in the EDA’s
efforts because it favours a rather different approach, an enforced,
Commission-regulated European defence market. In December 2006, the
Commission published a document that exploits existing case law to limit
the potential use of Article 296.7 In the coming years the Commission is
expected to take more cases to the European Court of Justice to further
limit the possible application of Article 296. And just before Christmas
the Commission published its long-promised draft defence directive which
applies Community procurement rules (adapted to take account of the
specificities of the defence sector) to those areas of the market not covered
by Article 296. The Commission seems determined to deal with
protectionism, but will its approach help to make the European defence
industry more competitive and better able to compete in a global market?
Well, possibly.
The general aims of the Commission – to limit protectionism and
encourage rationalisation – are wholeheartedly supported by the defence
industry. EDA’s own initiatives are unlikely to produce dramatic results
in the near term, so the Commission’s rather tougher approach is
justifiable even if it might ruffle a few feathers. But some possible
problems with the defence directive have already been identified. For
example, it is unclear whether the directive will create a level playing field
across Europe or whether it could be ignored by some governments while
others place their industry at competitive disadvantage by implementing
it? The rather uneven adherence to community law across the EU does
not, unfortunately, inspire confidence….
So what can we conclude from all this? The good news is that we are at
last seeing real action. Reform of the defence procurement environment in
Europe is more than a decade overdue and the Commission measures
under consideration could build on and accelerate the work of the EDA.
But the European Council and Parliament must ensure that the
Commission’s intervention reinforces EDA initiatives and is not driven by
a desire to increase Commission competence.8
2:4 The European Commission’s Initiative in Response to Article 296. In its
Interpretative Communication of March 2003,9 the European Commission identified
better procurement law as a key to the establishment of a European Defence Equipment
7
Discussed below in 2:5
“Competence” Refers to the Commission’s power and influence, and not its expertise.
9
COM(2003) 113, 11 March 2003
8
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Market. This was followed by the publication of a September 2004 Green Paper, 10 in
which the participants concluded that defence procurement was not functioning properly
primarily because of the Member States’ disparate application of Article 296 and the
vagueness of the Article itself, and also because the applicable Directive (2004/18/EC)
was perceived as inadequate for the security issues in defence procurement. The Green
Paper concluded that an interpretative communication was needed on Article 296, and
perhaps even a new directive on defence procurement “to which the derogation of Article
296 does not apply.”11 The first recommendation resulted in a December 2006
Interpretative Communication on the Application of Article 296 (discussed below in 2:5),
which stressed that the exemption of Article 296 is subject to the decisions and
interpretations of the European Court of Justice (which takes a narrow view of the
Article’s application), and by the Article’s own terms that it applies only when “essential
security interests” are at issue. A year later, in December 2007, the Commission released
a “Defence Package” of initiatives to facilitate greater intra-Community trade in defence
procurement, while still allowing the Member States to exercise satisfactory control over
their security-related matters and issues. The Package also included a call for a separate
Directive on Defence Procurement (which became the August 2009 Defence Directive), a
Directive on Intra-Community Defence Transfers, and a Communication on the
Competitiveness of European Defence Industries.
2:5. The European Commission’s December 2006 Interpretative Communication on
the Application of Article 296.12
The European Commission’s Interpretative
Communication on the application of Article 296 is, together with the decisions of the
European Court of Justice cited therein, a very unambiguous position paper on the proper
– and improper - application of Article 296. The Interpretative Communication posits the
two bases for the issue, Article 10 of Procurement Directive, 2004/18/EC and Article 296
itself. As the Communication observes, the application of Article 296 cancels the
application of Directive 2004/18/EC, which Directive is an
…expression of the fundamental principles and objectives of the Internal
Market. Thus, any derogation under Article 296 TEC touches on the core
of the European Community and is, by it very nature, a legally and
politically serious matter.13
The Communication stresses that while security is a matter for the individual Member
States and must be balanced against other considerations in public procurement, the
Members’ obligations under the Treaty, especially as explained in decisions of the Court
of European Justice, are to interpret and apply Article 296 in a restrictive manner, and to
reserve its application to exceptional cases.14 The Communication referenced the EU’s
10
COM(2004) 608, 23 September 2004
This did not happen. Article 296 applies to 2009 Defence Directive, discussed bellow at 3:7
12
Interpretative Communication on the Application of Article 296 of the Treaty in the Field of Defence
Procurement, (COM(2006) 779, SEC (2006) 1554 and 1555, 7 December 2006)
13
COM(2006) 779, 7 December 2006 at ¶2
14
The Communication cited several ECJ decisions, inter alia, Commission v. Spain, Case C-414/97, 16
September 1999 in which the Court stated that the Article does not lend itself “to a wide interpretation.”
11
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1958 list of defence articles15 and cited European Court of Justice cases for the
proposition that Article 296 applies only to articles of that list,16 and that as to those
articles, the exemption is not automatic and is only warranted in the narrow
circumstances that Article 296 was intended to address. The Communication then puts
forth specific considerations for the application of Article 296:17
● The specific security interest at issue;
● The connection between the security interest and the specific procurement
decision; and
● Why the non-application of the Public Procurement Directive in this specific
case is necessary for the protection of the security interest.
The Communication further states that in making the case for the application of Article
296, the burden is on the Member State seeking the exemption,18 and that “General
references to the geographical and political situation, history, and alliance commitments
are not sufficient in this context.”19
Finally, the Commission reminds the Member States of its role, which is not as a security
manager for the Member States, but as a “guardian of the treaty;” of the Members’
obligations to cooperate with the Commission in its investigations and oversight; and of
the Commission’s powers in cases of infringements.
2:6. The 2009 Defence Directive. The Defence Directive follows the adoption of
Directive 2009/43/EC on Intra-Community Transfers of Defence Products, which was
issued in December 2008. It represents an extremely definitive effort to establish a
credible regime20 specifically for defence procurement. Through the Defence Directive,
the European Commission hopes to advance the establishment of a single market for
European defence and to improve the transparency of defence contracting in the
European defence and security market, a market with an estimated value of about €100
billion. The Directive applies to contracts for the supply of military and sensitive
15
Council Decision 255/88, 15 April 1958
Members were invoking Article 296 for items that were clearly not on the list and that bore little relation
to defense.
17
COM(2006) 779, 7 December 2006 at ¶5
16
18
Even before the promulgation of the Defence Directive, European Court of Justice decisions began to
shift the burden to the Member State invoking Article 296 to demonstrate that the regular procurement
Directive could not be used to satisfy their legitimate security concerns. See David Broomhall, HansJoachim Priess and Victoria Harris, writing on the European Union in Public Procurement 2009 at p.76.
19
COM(2006) 779, 7 December 2006 at ¶6
The term “regime” is used in U.S. English primarily to refer a government or organizational body (often
in a pejorative sense). In its British and European English usage, the term is used primarily to refer to a
plan, regulation, or method. That is the way it is used in the English language versions of the Directives of
the European Community.
20
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equipment (i.e., arms, munitions and war material, including sensitive security
equipment) and to works, supplies and services directly related to those items. The
Defence Directive seeks to remedy the over-application of Article 296 by giving Member
States more authority to impose security measures in their contracting procedures so as to
obviate the situations that were previously cited as justification under Article 296 for
derogation from the EU procurement rules. If the authorities and practices provided in
the Defence Directive are properly used to require and establish security safeguards in
defence contracting, commentators believe that it will remove the bases (at least the ones
previously claimed) for invoking exemptions under Article 296. The intent is that now
Article 296 will be invoked only in cases where the security requirements are so high that
even the existence of the contract is secret.21 It is, of course, too early to assess the
impact of the Defence Directive, but it could result in significant opportunities for
companies, including American companies that already have a significant penetration in
the EU market, to compete for defence contracts on a more level and transparent playing
field.
2:7. Current Status of the Defence Directive. On 22 January 2009 the European
Council Secretariat published a summary of the European Parliament’s first reading of
the Directive. The approved version of the Directive was signed at Brussels on 13 July
2009, and was published in the Official Journal of the European Union on 19 August
2009. It entered into effect on 20 August 2009.22 As with the other “Directives” in the
European Union, especially those pertaining to contracting and trade practices, the tenets
of the Defence Directive – some of which are mandatory while others are permissive –
are to be incorporated (“transposed”) into each Member State’s national laws by 21
August 2011.23 In so doing, the Directive requires the Member States to report the text of
any new or modified national laws based on the Defence Directive, and such laws are to
contain, in their official text or accompanying comments, a reference to the applicable
provisions of the Defence Directive.24
2:8. The Text of the Defence Directive. The English text of the Defence Directive is
available at: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:216:0076:0136:EN:PDF
Section 3
The 2009 Defence Directive – An Analysis
21
Allen Green and Flavia Distefano, New EU Directive Procurement Directive Enters Into Force, client
alert paper, McKenna Long & Aldridge, August 27, 2009, p. 2
22
Depending a nation’s legal perspective, the Defence Directive is either now in effect (the more accurate
legal view), or its comes into effect when a Member State implements the Directive in its national laws,
which would leave the Member under the existing European Union procurement regime of Directives
2004/17 and 2004/18/EC until then.
23
Defence Directive, Art. 72(1) and 72(2) (citations to the Defence Directive will hereafter be to its
Articles (“Art.”) or its Coordinating Provisions (“CP”)
24
Art. 72(1)
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Directive 2009/81/EC of the European Parliament and Council
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 Field of Defence and Security, and Amending Directives 2004/17/EC and
2004/18/EC
3:1. Introduction. The Defence Directive does not represent a procurement regime that
is in sharp contrast to the Procurement Directives of 2004/17/EC and 2004/18/EC,25 or to
the Remedies Directives. It does, however, provide the authority for imposing defence
and security-related rules that are intended to overcome the main reasons previously cited
for invoking the exemptions of Article 296. The Defence Directive is consistent with the
EU procurement principles of non-discrimination, equal treatment, transparency, mutual
recognition, and proportionality
3:2. Significant Features of the Defence Directive
● Information Security (Article 22). The Directive allows Contracting Authorities
to require contractors to produce adequate assurances of their ability to safeguard
sensitive or otherwise controlled information or data as a condition or qualification for
contract award. This requirement can also be imposed on subcontractors, and the
confidentially and security requirements can be imposed in a manner that will precede
(i.e., during tendering) and survive the period of contract performance.
● Supply Security (Article 23). The Directive allows Contracting Authorities to
establish security requirements involving supplies as a condition of contract award and
contract compliance. This includes requiring adequate pre-contract proof and assurances
of the contractor’s ability to effect adequate physical security for storage and transit; to
comply with export control requirements; and to maintain supply and service in the event
of a crisis. Potential contractors can also be required to provide information regarding
their supply chains and/or strategies and commitments concerning the maintenance,
modernization, or modifications of supplies under the contract.
● Procurement Procedures (Articles 25-27). In modifying their national procedures
to adjust for the new Defence Directive, Member States now have the unrestricted choice
to apply either the “Restricted Procedure,”26 or the “Negotiated Procedure With Prior
Publication of a Contract Notice,”27 the later of which can now be applied without the
requirement for a justification, unlike under Directive 2004/18/EC. The “Competitive
Dialogue” procedure is also available for complex cases where the exact contract solution
25
Art. 70 of the Defence Directive amends Article 22a of 2004/17/EC to make it inapplicable to contracts
subject to the Defense Directive, and Art. 71 of the Defence Directive does the same for contracts
previously covered by Directive 2004/18/EC.
26
Art. 28(2)(a) and (b)
27
Arts. 55 ,56, and 59
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to the requirement is not clear or certain.28 The “Negotiated Procedure without
Publication of a Contract Notice”29 is also available under the Defence Directive for
cases of urgency or where proprietary rights effectively limit award to one contractor.
There is also provision for the use of Framework Agreements,30 and the duration of a
Defence Directive Framework Agreement is more flexible than under the general
procurement rules of 2004/18/EC. The Defence Directive does not address the use of the
Open Procedure.
● Research and Development. As to R&D that is not exempt from the Directive,
the Directive contains provisions for R&D in addition to those under the public sector EU
Directives, and its allows for the award of the R&D contracts that are subject to the
Directive on the basis of the Negotiated Procedure without a Prior Contract Notice.31
● Review Procedures (Articles 55, 56, and 59). The Defence Directive establishes
mandatory criteria for national review procedures to insure that Contracting Authorities’
actions can be reviewed effectively and efficiently upon the challenge of an aggrieved
contractor. The Directive provides for a “corrective mechanism” under which the
European Commission may intervene if it considers that there has been a serious
infringement of EU law in a contracting procedure or in the award of a contract. 32 For
purposes of challenging the invocation of an Article 296 exemption, this, in addition to
the decisions of the European Court of Justice, will place the burden on the Member State
to demonstrate that the use of the Defence Directive procedures would be inadequate to
protect the Member’s security interests, and it also gives contractors who are prevented
from competing because of the invocation of Article 296 the ability to complain to the
European Commission. In fact, it is the exercise of these review powers by both the
European Commission and the bidders to challenge the use of Article 296 that is seen as
the key to how effective the Defence Directive will be in opening the EU defence
market.33
3:3. The Composition of the Defence Directive. The Directive consists of three parts:
1) introductory “coordinating provisions;” 2) the substantive text of the Directive itself;
and 3) Annexes. The Comparative Assessment’s following presentation of the Defence
Directive is not in the order of the topics in the Directive itself.
● Coordinating Provisions to the Directive. The Directive begins with 79
numbered paragraphs of introductory comments. The style of these comments, preceded
by “whereas,” indicate that they are “recitals,” and, under the general principles of legal
interpretation, they are not binding or a part of the Directive. However, as used in the
Directive, it is clear that these comments are intended to impart substantive and
28
29
30
31
32
33
Art. 27
Art. 28
Art. 29
Art. 28(2)(a)
Art. 63
Green and Distefano, id., at p.2
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interpretative value to the text of the Directive. Some of the Coordinating Provisions
address general, strategic, and visionary comments about the security and defence posture
of the European Union, while others compliment and amplify the specific procurement
rules in the text of the Directive.
● The Substantive Text of the Defence Directive. The Directive is divided into 5
Titles: 1) Definitions and General Principles; 2) Rules on Contracts; 3) Rules Applicable
to Subcontracting; 4) Rules Applicable to Reviews; and 5) Statistical Obligations,
Executory Powers, and Final Provisions. The Titles are divided into Chapters, Sections,
and Articles. There are 75 Articles in the Directive.
● Annexes to the Defence Directive. There are 8 Annexes to the Directive:
categories of services;34 technical specifications;35 the content of contract and subcontract
opportunity notices;36 the publication of contract awards;37 national registers of approved
sources;38 and technical standards for electronic procurement.39
3:4. Reporting Requirements Under the Defence Directive (Articles 65 and 66).
Member States are required to submit an annual report by 31 October to the Commission
on their application of the Defence Directive.40 The content of the Report is governed by
Article 66, which is to include the number of contracts awarded under the Defence
Directive; the value of those contracts; subject matter of the contracts (e.g., services or
supplies);type of procedure used to award the contracts (e.g., negotiated, competitive
dialogue, etc.); and other matters to be determined in accordance with the Committee
Procedure of Article 67.41
3:5. Revisions and Amendments. The Directive also serves as the authority for the
revision of thresholds,42 and establishes procedures for certain amendments.43
3:6. Strategic Comments of the Defence Directive. The Coordinating Provisions
contain several comments that put the Defence Directive in its strategic context.
● Reaffirmation of the Member’s Role in its own National Security, and a
Reaffirmation of Article 296. The Directive begins by affirming that each Member
34
35
36
37
38
39
40
41
42
43
Annexes I and II
Annex III
Annexes IV and V, respectively
Annex VI
Annex VII
Annex VIII
Art. 65
Art. 66
Art. 68
Art. 69
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State is responsible for its own defence and security,44 while positing that a strong
European Defence Technological and Industrial Base is essential for the successful
implementation of the European Security and Defence Policy,45 and that the base should
be capability-driven, competent, and competitive. Desirable features for a strong base
include a “truly European defence equipment market,” characterized by the integration of
small and medium-sized businesses, non-traditional defence contractors, and efficient and
responsive lower tier suppliers.46 From here, the Directive immediately references
Article 296 and the Commission’s Interpretative Communication on Article 296 in a clear
call for a narrow interpretation and application of that Article.47
● The Need to Address Security Concerns in Procurement. The Coordinating
Provisions’ next statements connect procurement to security,48 and the Directive
expresses both a recognition that security-related procurements are often a “sensitive”
subject for Member States,49 while also recognizing the need for a legislative framework
that addresses the need to satisfy the security concerns of the Member States,50 which
today must address asymmetrical transnational threats that tend to blur the distinction
between internal and external threats and military and non-military security.51 With
specific reference to Article 296, the Directive makes it clear that the Article should be
interpreted and applied so as to allow Contracting Authorities - without invoking the
exemption - to take all necessary measures to safeguard their security interests when
contacting for defence and security-related items.52
3:7. The Applicability of Defence Directive (Articles 2 and 3). The applicability of the
Defence Directive is set out in Articles 2 and 3 and is based on Articles 30, 45, 46, 55,
and 296 of the Treaty;53 the nature/subject matter of the purchases;54 and to “threshold”
amounts of the procurement.55
44
CP. (1)
CP. (2)
46
CP. (3)
47
CP. (3). Citing the European Commission Interpretative Communication of 7 December 2006 regarding
Article 296, and the Commission’s 5 December 2007 Communication on a Strategy for a Stronger and
More Competitive European Defence Industry.
48
In CP. (5) the Directive makes it clear that its purpose is the security issue, as called out in the European
Parliament’s Green Paper on Defence Procurement (OJ C 280 E, 18.11.2006, at p.463).
49
CP. (8)
50
CP. (4)
51
CP. (7)
52
CP. (16). The Directive also cites Articles 30, 45, 46, and 55 of the Treaty.
53
Art. 2
54
Art. 2(a)-(d)
55
Art. 8
45
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● Covered Purchases (Article 2(a)-(d) and Articles 15-17). The Defence Directive
applies to contracts and framework agreements for the supply of military equipment,56
including any parts, components and/or subassemblies thereof; the supply of sensitive
equipment,57 including any parts, components and/or subassemblies thereof; and works,
supplies, and services58 directly related to military and sensitive equipment for any and
all elements of its life cycle;59 and works and services specifically for military purposes
or sensitive works and sensitive services.60 As the Coordinating Provisions point out, the
Directive takes into account the needs of the Contracting Authority61 for works or
services that are not directly linked to the supply of military or sensitive equipment, but
which are necessary to meet certain military or security requirements. 62 The Directive
lists 20 categories of services that are subject to the full Directive, 63 and six that are
subject only to the rules on specifications and notice of award.64 If a contract has
services that would bring it under both Annex I and Annex II, the Directive specifies that
if the services that are subject to Annex I exceed the cost of those in Annex II, the
contract is subject to the full Directive.65
● Mixed Contracts (Article 3). A contract is “mixed,” if it has objects that would
bring it within the scope of more than one Directive or authority. In such a case, the
Defence Directive provides that it takes precedence over Directive 2004/17 and
56
Art. 2(a). “Military equipment” is defined as equipment that is specifically designed or adapted for
military purposes and intended for use as arms, munitions, or war material, Art. 1 (6). Coordinating
Provision 10 elaborates that military equipment, for purposes of the Defence Directive, should be
understood as the product types in the list or arms, munitions, and war materials adopted by the Council in
its Decision 255/58 of 15 April 1958, and that Member States may limit themselves to that list when
transposing the Defence Directive. Also, while that 1958 list includes only equipment that is designed,
developed, and produced for specifically military purposes, that the list is generic and should be interpreted
in a broad way in light of the evolving character of the technology, procurement policies, and military
requirements, that lead to the development of new types of equipment, such as items on the EU’s Common
Military List and equipment that was initially designed and intended for civil use, but which has been
adapted for military use as arms, munitions, and war material.
57
Art. 2(b). “Sensitive equipment,” “sensitive works,” and “sensitive services” means equipment, works,
and services for security purposes, involving, requiring and/or containing classified information, Art. (7)
“Classified information” means any information or material, regardless of of form, nature or mode of
transmission, to which a certain level of security classification or protection has been attributed, and which,
in the interests of national security and in accordance with the laws, regulations or administrative
provisions in force in the Member State concerned, requires protection against any misappropriation,
destruction, removal, disclosure, loss or access by unauthorized personnel, Art 1(8).
58
A “work” is essentially a construction or civil engineering project, Art. 1 (3). A “supply” is a product
other than a work, Art. 1(4). A “service” is simply defined as other than a work or supply, Art. 1(5).
59
Art. 2(c)
60
Art. 2(d)
61
The Defence Directive uses the term “Contracting Entity” synonymously with Contracting Authority,
Art. 1(17)
62
CP. (14)
63
Art. 15 and Annex I. These services include maintenance and repair (Cat. 1), transportation and
logistical support (Cats. 5 through 10), defense and security related training and simulation (Cat. 20).
64
Art. 16 and Annex II. The Directive suggests that these services seem to be suitable for framework
agreements. They include food, legal, and health services.
65
Art. 17
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2004/18/EC.66 As the Coordinating Provisions explain, a contract may be covered
partially by the Defence Directive and also by Directive 2004/17/EC or 2004/18/EC, or
not by any of those three Directives. In those cases it may make sense to award a single
contract,67 and so the Defence Directive provides that a contract whose object falls only
partly under the Defence Directive, and not under Directives 2004/17/EC or 2008/18/EC,
is not subject to the Defence Directive.68 However, the Defence Directive specifically
cautions against the manipulation of the procurement so as to categorize it with a view to
avoiding what would otherwise be the proper application of the Defence Directive.69
● Thresholds and the Valuation of Contracts (Articles 8 and 9). Article 8 of the
Directive sets the threshold for its applicability at €412,000 for supply and service
contracts, and €5,150,000 for works contracts. The method of estimating the value of the
contract is controlled by Article 9, which provides that the estimate is to be based on the
net price, minus any taxes, and is to include options, renewals, and bonuses (i.e.,
permitted incentive payments).70 This estimate is made by the Contracting Authority at
the outset of the process.71 In this regard, the Directive provides detailed guidance on the
valuation of contracts for works, supplies, and services, to include variations of these
contracts, and for contracts awarded through framework agreements.72 As in the matter
of categorizing the type of contract (e.g., as for supplies or services), the Directive
cautions that thresholds may not be manipulated so as to avoid the proper application of
the Defence Directive.73 The Directive also addresses valuation in terms of Euro and
non-Euro Member State currencies, and it cites the authority of Commission to revise the
thresholds as needed.74
3:8. Contracts Excluded from the Defence Directive (Articles 11- 13). The Directive
addresses the contracts that are excluded from its coverage, and cautions that none of the
“rules, procedures, programmes, arrangements, or contracts referred to” in the exemption
provisions can be employed for the purpose of avoiding the otherwise proper application
of the Directive.75
● Contracts Governed by International Agreements (Article 12 and Coordinating
Provision 26). Excluded from the Directive are contracts that are under the terms of
international agreements between Member States; or between a Member State and one or
more third countries;76 contracts made under an international agreement concerning the
66
67
68
69
70
71
72
73
74
75
76
Art. 3
CP. (24)
Art. 3(2)
Art. 3(3) and CP. (24)
Art. 9(1)
Art. 9(2)
Art. 9(4) – (9)
Art. 9(3)
Art. 68 and CP. (76)
Art. 11
Art. 12(a)
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stationing of troops, or the operations of a Member State or third nation;77 and contracts
awarded under purchasing rules and commitments that a Member State properly owes to
an international organization.78
● National Security (Article 13(a)). First on the list of Article 13’s ten exclusions
are contracts that the Member State determines would require the release or publishing of
information, which publication or release would be “contrary to the essential interests of
security” – this is the language of exemption in Article 296. As the Coordinating
Provisions point out, Article 296 of the Treaty makes provision for this exemption, and It therefore follows that none of the provisions of this Directive should
prevent the imposition or application of any measure considered necessary
to safeguard interests recognized as legitimate by these provisions of the
Treaty.
This means that in particular the award of contracts which fall within the
field of application of this Directive can be exempted from the latter where
there is justified on grounds of public security or necessary for the
protection of essential security interests of a Member State. This can be
the case for contracts in the fields of both defence and security which
necessitate such extremely demanding security of supply requirements or
which are so confidential and/or important for national sovereignty that
even the specific provisions of this Directive are not sufficient to
safeguard Member States’ essential security interests, the definition of
which is the sole responsibility of the Member States. 79
Nevertheless, in accordance with the case law of the Court of Justice of
the European Communities, the possibility of recourse to such exemptions
should be interpreted in such a way that their effects do not extend beyond
that which is strictly necessary for the protection of the legitimate interests
that those Articles help to safeguard. Thus, the non-application of this
Directive must be proportionate to the aims pursued, and cause as little
disturbance as possible to the free movement of goods and the freedom to
provide services.80
As to classified contracts, the Defence Directive recognizes that defence and security
contracts often contain information that is classified under national law, and that such
information requires protection from unauthorized access.81 However it also recognizes
that, especially to non-military security matters, there is more diversity in the EU as to
classification, and that this should be taken into account in determining the applicability
77
Art. 12(b)
Art. 12(c)
79
CP. (16). This Coordinating Provision also cites Articles 30, 45, 46, and 55 of the Treaty.
80
CP. (17)
81
CP. (20)
78
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of the Directive to those situations.82 Moreover, the Coordinating Provisions recognize
that Article 296 does not distinguish between military and security for purposes of
disclosing information if to do so would be contrary “to the essential interests of their
security.” Significantly, the example the Coordinating Provisions posit is the case of
contracts that “are so sensitive that their very existence must be kept secret.”83
(emphasis added)
● Intelligence Purposes (Article 13(b)). Contracts for intelligence activities are
excluded from the Directive. As the Directive states, there are some contracts so
sensitive that it would be inappropriate to apply the Directive, even though the Directive
would otherwise adequately cover the procedure. These matters include procurements by
intelligence services; procurements in support of intelligence and counter intelligence
activities; purchases of a sensitive nature such as for border security, counter-terrorism
and crime fighting, or covert activities; or involving security-related special equipment,
such as encrypted devices.84
● Contracts to Carry Out Member States’ Cooperative Programs (Article 13(c)).
The Directive does not apply to contracts awarded in support of a cooperative program
between or among Member States based on research and development for a new product.
As the Directive observes in the Coordinating Provisions, Members often pursue
programs to develop new defence equipment together, and that these programs are
important, inter alia, because they spread the cost of the research and development of
weapons systems. As examples, the Directive specifically cites programs under the
Organisation conjointe do cooperation en maitere d’armement (OCCAR), NATO
agencies, and agencies of the European Union, such as the European Defence Agency, as
being excluded from its coverage.85
● Contracts Awarded in a Third Country (Article 13(d)). The Directive does not
apply to contracts awarded in support of operations outside the Member States, including
“civil purchases,”86 where operational needs require that the purchase be made from local
sources in the area of operation. The Coordinating Provisions explain, this exclusion is
appropriate in circumstances of deployment, where operational necessity should allow
the Contracting Authority to make civil purchases, directly related to the operations, from
local contractors.87
● Government-to-Government Contracts (Article 13 ((f)). The Directive exempts
from its coverage contracts between one government and another – with no mention of
the status of the second nation (i.e., no requirement that the contract be between two
Member States) for “military or sensitive equipment,” works and services related to such
82
CP. (20)
CP. (20), ¶3
84
CP. (27)
85
CP. (28)
86
A “civil purchase” is a contract, not subject to the Defence Directive, for the purchase of non-military
products, works, or services for logistical purposes, Art. 1(28).
87
CP. (29)
83
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equipment, and works and services “specifically for military purposes, or sensitive works
and sensitive services.” As the Coordinating Provisions explain, given the specificity of
the defence and security sector, purchases of equipment as well as works and services by
one government from another should be excluded from the Directive.88
Research and Development Services (Article 13(j)). Except for research and
development contracts where the benefit accrues exclusively to the Contracting Authority
for its own use in the conduct of its own affairs, the Defence Directive does not apply to
contracts for research and development.
Other Article 13 Exclusions (Article 13(c), (g)-(i)). The Directive does not apply
to realty transactions,89 arbitration and conciliation services,90 financial services (except
insurance transactions),91 and contracts of employment.92
3:9. General Principles of the Defence Directive (Article 4). Contracting authorities
are required to act in a transparent way, and to treat economic operators93 equally and in a
non-discriminatory manner.94
Key Concepts and Terms Under the Directive95
3:10. Contracts and Subcontracts (Articles 1(2) and 1(22), respectively). A contract is
a contract for a pecuniary interest.96 A subcontract is a contract for pecuniary interest,
concluded in writing between a successful tenderer for a contract, and one or more
economic operators for the purpose of carrying out the contract.97
3:11. Government Participants in Procurement
● Government (Article 1(9)). This is the state, or regional or local government, of a
Member State or third state.
● Contracting Authority (or Contracting Entity) (Article 1(17)). The Defence
Directive simply states that Contracting Authorities, or Entities, are the same as in the
88
CP. (30)
Art. 13(c) and CP. (31)
90
Art. 13(g) and CP. (32)
91
Art. 13(h) and CP. (33)
92
Art. 13(i)
93
The Directive makes it clear that the terms “contractors,” “suppliers,” “service providers” of Art. 1 (13)
are used synonymously, and in Art. 1(14) it states that the commonly-used term in Europe “economic
operator,” means the same as contractors, suppliers, and service providers.
94
Art. 4
95
Some of these terms and concepts, while set out at this portion of the paper, will be repeated in
footnotes in order to facilitate the reading of the paper.
96
This is the same as Directive 2004/17/EC, Art. 1(2)(a) and Directive 2004/18/EC, Art. 1(2)(a).
97
Art. 1 (22)
89
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other two EU Procurement Directives, 2004/17/EC and 2004/18/EC. 2004/18/EC, the
main EU Procurement Directive, defines a Contracting Authority as follows:
[a] State [i.e., country], regional or local authorities, bodies governed by
public law, associations formed by one or several authorities or one of
such bodies governed by public law. A “body governed by public law”
means any body: (a) established for the specific purpose of meeting needs
in the general interest, not having an industrial or commercial character;
(b) having a legal personality; and, (3) is financed, for the most part, by
the State, regional or local authorities, or other bodies governed by public
law; or subject to management supervision by those bodies; or having an
administrative, managerial or supervisory board, more than half of whose
members are appointed by the State, regional or local authorities, or by
other bodies governed by public law.98
Annex III of 2004/18/EC contains a “non-exhaustive list” of bodies that are intended to
be Contracting Authorities by the Member States.99
● Central Purchasing Bodies (Articles 1(18) and Art. 10). A Central Purchasing
Body is the same as under the two basic procurement Directives, 100 and is a public body
of the European Union that contracts for, or awards framework agreements for the use of,
Contracting Authorities. However, as that concept and term is frequently used, to include
in the Coordinating Provisions of the Defence Directive, a central purchasing body is any
Contracting Authority that purchases on behalf of, or for the use of, several government
customer agencies. As the Coordinating Provisions state:
Centralised purchasing techniques help to increase competition and
streamline purchasing. Consequently, Member States should be allowed
to provide that Contracting Authorities/Entities may purchase goods,
works, and/or services through a central purchasing body. Provision
should be made for a community definition of central purchasing bodies
and of the conditions under which, in accordance with the principles of
non-discrimination and equal treatment, Contracting Authorities/Entities
purchasing works, supplies, or services through a central purchasing body
may have been deemed to have complied with this Directive. A
Contracting Authority/Entity which is bound to apply this Directive
should in any event be eligible to act as a central purchasing body. At the
same time, Member States should also be free to designate European
public bodies not subject to this Directive, such as the European Defence
Agency, as central purchasing bodies, provided that such bodies apply
98
2004/18/EC, Art. 1(9)
Whether an organization is a “contracting authority,” and therefore subject to the rules of public
procurement, is usually not an issue in the European Union, but it can be such as is the case of Cambridge
University (case C-380/98) and registered social landlords in the United Kingdom (in European
Commission v. France (case C-237/99, which held that such situated persons are contracting authorities).
100
Directive 2004/17/EC, Art. 2(1)(a) and Directive 2004/18/EC, Art. 1(9).
99
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procurement rules compliant with all the provisions of this Directive to
those purchases.101
3:12. Private Sector Participants
● Contractors or Economic Operators (Articles 1(13) and (14). A contractor is a
natural or legal person (i.e., an individual or a business organization, or consortium of
such), that offers on the market to execute works, to supply products, or to provide
services. The Directive specifies that terms “contractor,” economic operator,” “supplier,”
and “service provider” are used synonymously. Economic operators that are duly
authorized to engage in business under the laws of their Member State cannot be
discriminated against by another Member State on the basis that their status as a legal
entity does not match the legal requirements of the contracting Member’s state.102
However, Contracting Authorities may always require adequate proof of the
qualifications of the economic operators that seek the contract.103
● Consortia. Economic operators may seek contracts jointly, and without any
specific legal form, but they may be required to assume a legal form (e.g., a legallyrecognized joint venture), if the Contracting Authority determines that such is needed to
insure the proper execution and management of the contract.104
● Candidates and Tenderers (Article 1(15) and (16), respectively). A Candidate is
an economic operator that has submitted an application to participate in a Restricted or
Negotiated Procedure, or a Competitive Dialogue, and which hopes to be invited by the
Contracting Authority to submit a tender. A Tenderer is an economic operator that has
submitted a tender.
3:13. Categories of Purchases by Subject. The categorization of a purchase by type
will affect the Directive rules that apply to the procurement.
● Works Contracts (Article 1(3)). A works contract is basically one for design or
other engineering services to accomplish construction, as well as the actual construction
of a building or civil engineering work. The recitals specify that a contract is a works
contract only its subject matter is covered by the Common Procurement Vocabulary.105
This is so even if the works contract includes some services.
● Supply Contracts (Article 1(4)). A supply contract is one, other than for works,
for the purchase, lease, rental or hire-purchase, with or without the option to buy, of
products. The Directive states that a contract whose terms include “sitting and
101
CP. (23)
Art.5 (1)
103
Art. 5 (1)
104
Art. 5 (2)
105
CP. (19). The Common Procurement Vocabulary is the nomenclature applicable to contracts as set out
in EC Regulations No. 2195/2002, Art. 1(1).
102
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installation,” of the supply is still a supply contract. 106 The Coordinating Provisions
recognize that service contracts may, in some cases, include works that are a consequence
of the service or a compliment of the service, and in those cases the contract does not lose
its classification as a service contract.107
● Service Contracts (Article 1(5)). This is a contract for other than works or
supplies, and whose object is services. The Directive specifies that if a contract is for
both supplies and services, its categorization is determined by the predominant cost
component.108 The Directive treats service contracts according to their classification in
the Annexes of the Directive. Service contracts that fall under both Annexes are treated
in accordance with the rules for the Annex that accommodates the major amount of their
effort.109
● Research and Development (Article 1(27)). Research and Development means all
activities comprising fundamental research, applied research, and experimental
development, where the latter may include the realization of technological demonstrators
to show the performance of a new concept or new technology in a relevant or
representative environment. Contracts for research and development are not subject to
the Defence Directive unless they are to provide their benefits exclusively to the
Contracting Authority, for the Contracting Authority’s use, and are paid for entirely by
the Contracting Authority.110 As the Coordinating Provisions explain:
For the purposes of this Directive, research and development should cover
fundamental research and experimental development.
Fundamental research consists in experimental or theoretical work
undertaken mainly with a view to acquiring new knowledge regarding the
underlying foundation of phenomena and observable facts, without any
particular application or use in view. Applied research also consists of
original work undertaken with a view to acquiring new knowledge.
However, it is directed primarily towards a particular practical end or
objective.
Experimental development consists in work based on existing knowledge
obtained from research and/or practical experience with a view to
initiating the manufacture of new materials, products or devices,
establishing new processes, systems or services, or considerably
improving those that already exist. Experimental development may
include the realisation of technological demonstrators, i.e., devices
106
Art. 1(4), ¶2
CP. (19)
108
Art. 1(5), ¶2
109
See Arts. 15, 16 and 17
110
Art. 13(j)
107
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demonstrating the performance of a new concept or a new technology in a
relevant or representative environment.
Research and development does not include the making and qualification
of pre-production prototypes, tools and industrial engineering, design and
manufacture.111
● Reserved Contracts (Article 14). While not a “type” of contract, these are
contracts that are reserved for the participation of “sheltered workshops,” or employment
programs whose employees are disabled to the point where they cannot labor under
normal conditions. The Coordinating Provisions recognize that useful employment is an
opportunity for all to contribute and to integrate themselves into society. If there are
sheltered workshops and employment programs that afford employment opportunities to
disabled individuals, it is appropriate for the Directive to allow Member States to reserve
contracting opportunities that are subject to the Directive to such organizations.112
3:14. Categories of Items by Defence or Security Significance
● Military Equipment (Article 1(6)). This is equipment that is specifically designed
or adapted for military purposes and is intended as an arm, munitions, or war materiel.
● Sensitive Equipment, Works, and Services (Article 1(7)). These are equipment,
works and services that involve, require, or contain classified information.
● Classified Information (Article 1(8)). This is any information or material,
regardless of form, nature or mode of transmission, to which a certain level of security
classification or protection has been attributed, and which, in the interests of national
security and in accordance with the laws, regulations or administrative provisions in force
in the Member State concerned, requires protection against any misappropriation,
destruction, removal, disclosure, loss or access by any unauthorized individual, or any
other type of compromise.
3:15. Security Requirements. The provisions regarding the requirements for contractors
ensuring the security and proper handling of classified and sensitive information are the
real contributions of the Defence Directive and its efforts to minimize the invocation of
Article 296. The Defence Directive is unambiguous about the significance of a
contractor’s ability to effect the required level of security qualifications and performance.
Given the sensitive nature of defence and security sectors, the reliability of
economic operators to which contracts are awarded is vital. This
reliability depends, in particular, on their ability to respond to
requirements imposed by the Contracting Authority/Entity with respect to
security of supply and security of information. In addition, nothing in this
111
112
CP. (13)
CP. (35)
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Directive should prevent a Contracting Authority/Entity from excluding an
economic operator at any point in the process for the award of a contract if
the Contracting Authority/Entity has information that to award all or any
part of the contract to that operator could cause a risk to the essential
security interests of that Member States.
As the Coordinating Provisions point out, Contracting Authorities may impose conditions
regarding security of information and supply, and
…these requirements are particularly important given the sensitive nature
of the equipment covered by the Directive, and concern the whole of the
supply chain.113
● Security Clearances and Certifications (Article 22). The Defence Directive
states that, in the absence of harmonization at the Community level, Member States may
apply their own national security requirements, but should accept, if comparable to their
own, the security clearances and standards of other nations.
● Treatment of Classified Information by Economic Operators (Article 7). This is
one of the important new features of the Defence Directive. It provides the authority for
conditioning the award of defence contracts on the security qualifications of contractors
and subcontractors at all phases of the procurement. Article 7 provides:
Contracting Authorities/entities may impose on economic operators
requirements aimed at protecting classified information114 they
communicate throughout the tendering and contracting procedure. They
may also request economic Operators to ensure compliance with such
requirements by their subcontractors.
Article 7 lays the foundation for the treatment of security in Articles 22 and 23.
● Security of Information (Article 22). If a contract will involve classified
information, this is to be announced in the contract notice, as well as the conditions that
will be imposed on the contractor regarding security and the handling of classified
information. In that regard, the Contracting Authority may require commitments or other
demonstrations, from tenderers that they and their proposed subcontractors can
appropriately handle and safeguard classified information at all times – including in the
113
CP. (42)
114
Classified Information is defined at Art. 1(8) as “information or material, regardless of form, nature or
mode of transmission, to which a certain level of security classification or protection has been attributed,
and which, in the interests of national security and in accordance with the laws, regulations or
administrative provisions in force in the Member State concerned, requires protection against any
misappropriation, destruction, removal, disclosure, loss or access by any unauthorized individual, or any
other type of compromise.”
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tendering and post-contract phase.115 The Contracting Authority may also require a
commitment from the contractor to submit this type of information as to any
subcontractors that are proposed to be added to the work after the contract has been
awarded.116 As the Coordinating Provisions explain, in order to ensure security of
information, Contracting Authorities may require commitments from both contractors
and subcontractors to protect classified information from unauthorized access and
disclosure, and to demonstrate their capacity to do so as a condition of, or qualification
for, contract award. Furthermore, where there are no applicable European Community
standards, Contracting Authorities may apply their own national standards in determining
a contractor’s or subcontractor’s ability to manage and safeguard classified
information.117
● Security of Supply (Article 23). Security of supply can involve a variety of
requirements, including internal rules between subsidiaries and the parent company with
regards to intellectual property rights, the provision of critical services, and maintenance
capabilities to ensure support over the life cycle of purchased equipment.118 To effect
these security requirements, and to evaluate a tenderer’s subcontractors’, or suppliers’
ability to satisfy the requirements, to include physical security in storage and transit, and
compliance with export controls, the Contracting Authority may require proof or
satisfactory information.119 In addition to security and export control, the Contracting
Authority may require adequate proof or assurances that contractors (and their supply
chains) would be able to meet their delivery obligations under a “crisis” situation.120 The
Contracting Authority may require satisfactory information from the tenderer’s national
authorities about the ability to supply under crisis conditions.121 The Contracting
Authority may also require the tenderer to provide satisfactory proof of its ability, as
applicable, to effect maintenance, modification or modernization of the supplies,122 as
well as spare parts, testing equipments, drawings, etc.123
● Satisfying Security Standards (Article 42(1)(j)). The Defence Directive, in the
part covering the qualifications of contractors, provides that in regards to the Contracting
Authority’s call for proof of the candidates/tenderer’s ability to process, transmit, and
store classified information, that, in the absence of a European Community standard on
security, Contracting Authorities may use their own national systems.124 In such
circumstances, the Directive requires Contracting Authorities to recognize security
115
Art. 22(a), (b) and (c)
Art. 22(c) and (d)
117
CP. (43)
118
CP. (44). See also CP. (42). “Life cycle” means all the possible successive stages of a product, i.e.,
research and development, industrial development, production, repair, modernization, modification,
maintenance, logistics, training, testing, withdrawal, and disposal. Art. 1(26)
119
Art. 23(a), (b) and (c )
120
Art. 23(d)
121
Art. 23(e)
122
Art. 23(f)
123
Art. 23(g)
124
Art. 42(j) and (j), ¶2
116
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systems that are equivalent to the Contracting Authority’s nation.125 The Contracting
Authority may allow contractors without the requisite clearances to compete for award,
provided they obtain the necessary clearance if selected. In these cases, this condition,
and the time limits for obtaining the clearance, are to be contained in the contract
notice.126
The Contracting Authority may request the authorities of the
candidate/tenderer’s Member State to report on the security status of the
candidate/tenderer’s facilities and personnel, and on its ability to manage sensitive
information.127
The Contracting Process
3:16. Notice. The European Union views timely, complete, and well-publicized notice
of what a Member State intends to contract, what they are contracting, and what they
have contracted, as an essential characteristic of transparency, equal treatment, and
competition. As the Coordinating Provisions state:
In order to ensure transparency, provision should be made for rules on
publication by the Contracting Authorities/Entities of appropriate
information prior to, and at the end of, the award procedure.128
Not surprisingly then, European Community rules on public procurement stress, in detail,
the publication of contracting activities. The EU Defence Directive provides detailed
mandatory rules for effecting the public notice of prospective and actual contracting
opportunities, even in cases where the rules do not require notice.129
● Types of Notice. There are basically four types of notice; three public and one
internal to the actual competitors.
► Prior Information (Article 30(1) and Annex IV, Prior Information Notice and
Notice of a Publication of a Prior Information Notice on a Buyer Profile). This
announces prospective contracting opportunities that the Contracting Authority believes
it will engage in the coming period (up to a 12 month forecast).
► Contract Notices (Article 30(2) and Annex IV, Contract Notices). These
notices announce actual contract opportunities, and invite requests to render, to negotiate,
to engage in a Competitive Dialogue, or to compete for a Framework Award.
► Notice of Selections and Non-Selections (Article 35(1) and ¶3:41 below).
This is the internal notice to the competitors of the winning and non-selected participants.
125
Art. 42(j), ¶2, and CP. (68)
Art. 42(j), ¶3
127
Art. 42(j), ¶4
128
CP. (56)
129
Art. 31
126
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► Contract Award Notice (Article 30(3) and Annex IV, Contract Award Notice
and ¶3:42 below). This is public notice of a contract award or the selection of
participants under a Framework Agreement.
● Effecting Notice (Article 32). Basically, the required notices are effected
electronically at the European Community level and the Contracting Authority’s national
level.130 The Directive provides detailed mandatory rules on effecting notice. It specifies
the minimum content of notices and provides the format for notices; 131 the manner of
transmitting notices;132 and the language of notices.133 It encourages the media of notice
to be consistent with current technology (i.e., electronic) and also as simplified and
compatible as possible.134
● Notice of Prospective Contracting Actions – “Prior Information Notice””
(Article 30(1)). Contracting Authorities are encouraged to give notice of their twelve
month forecast of anticipated or prospective opportunities for contracts and framework
agreements. Publication can be effected through the European Commission or by the
Contracting Authority in its “Buyer Profile.”135
● Notice of Actual Contracting Opportunities – “Contract Notice” (Article
30(2)). Contracting Authorities must effect the required notice when they intend to
engage in a Restricted Procedure, Negotiated Procedure with Publication of a Contract
Notice, or Competitive Dialogue for the award of a contract or framework agreement in
an amount above the applicable threshold. As the Coordinating Provisions explain,
competition requires that notices be advertised throughout the European Community and
that the notice must be sufficient enough to enable economic operators to determine if the
opportunity is of interest to them, and for this they need adequate information.136 The
content of the notice is specified in the Directive in Annex IV.137 Annex IV lists 20 items
of information for inclusion in the Notice, and this includes whether the action is for a
contract or framework agreement;138 the criteria for contractors and subcontractors
regarding exclusion, economic standing, and technical capacities;139 the award
130
For notice at the national level, the Directive requires that such notice cannot precede notice at the
European Union level, and that the national notice must contain the same information that the Contracting
Authority provided to the EU for publication, Art. 32(5). It also requires that the Contracting Authority be
able to prove when it dispatched its notice to the European Union (Art. 32(7)), and that the Union advise
the Contracting Authority when it effected publication at its level, Art. 32(8).
131
Art. 32(1) and Annex IV. Contracting Authorities are free to include additional information, if deemed
necessary.
132
Art. 32(2) and (3)
133
Art. 32(4). It is to be in an official language of the Community, as chosen by the Contracting
Authority, with summaries of the notice in the other the Community languages.
134
CP. (57). Standards for electronic communication are referenced in CP. (59)
135
Art. 30(1). The Directive specifies the data to be estimated in the notice for supplies, services and
works, Art. 30(1)(a)-(c)
136
CP. (58)
137
Information to be Included in the Notices Referred to in Article 30, Contract Notices
138
Annex IV, Contract Notices, 3(d)
139
Annex IV, Contract Notices, 17 and 10 respectively.
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procedure140 and criteria for award;141 the specifications142 and any “particular conditions
to which the performance of the contract is subject;”143 any mandatory subcontracting
conditions;144 whether any variant submissions will be considered and under what
terms;145 the time and place for the submission of requests to participate,146 and the
reasons for any accelerated procedures; whether the number of participants will be
limited; and whether there will be successive phases to reduce those numbers and arrive
at the best tender.147
Specifications
3:17. Specifications. Contracts typically consist of a lot of standard terms and
conditions and also specifications. Standard terms and conditions are just that.
Specifications, on the other hand, are the unique terms and conditions that set forth what
the contract is all about, and what each party to the contract must do. In public
contracting, the Government usually writes the specifications, and the economic operator
is required to comply with the specifications and the government is obliged to make
payments for compliant performance by the contractor. Good specifications are
important for two reasons in public contracting: 1) they ensure that the government buyer
gets what it requires; and 2) they clearly communicate what is required so that potential
contractors can make an intelligent evaluation of the business opportunity; make quality
proposals (tenders); and execute the contract as intended by the government customer.
Bad specifications, on the other hand, can result in a bad contract and in skewed
competition. While the Defence Directive does not mention any of this, its treatment of
specifications clearly reflects the importance it attaches to specifications. In this regard,
the Defence Directive sanctions the practice of a “technical dialogue” during which
industry is solicited for their comments and suggestions on matters such as specifications
– as long as that does not result in an unfair advantage to any contractor.148 As the
Coordinating Provisions state:
The technical specifications drawn up by Contracting Authorities/Entities
need to allow to be opened up for competition. To this end, it must be
possible to submit tenders which reflect the diversity of technical solutions.
To do so, technical specifications should, on the one hand, be established on
the basis of performance and functional requirements. On the other hand,
where reference is made to the European standard or to international or
national standards, including those specific to the field of defence, tenders
140
141
142
143
144
145
146
147
148
Annex IV, Contract Notices, ¶3(a)
Annex IV, Contract Notices, ¶21
Annex IV, Contract Notices, ¶6
Annex IV, Contract Notices, ¶12
Annex IV, Contract Notices, ¶9
Annex IV, Contract Notices, ¶8
Annex IV, Contract Notices, ¶13
Annex IV, Contract Notices, ¶19 and ¶20
CP. (49)
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based on other equivalent arrangements must be considered by the
Contracting Authorities/Entities. This equivalence can be assessed in
particular with regard to interoperability and operational efficiency
requirements. To demonstrate equivalence, tenders should be permitted to
use any form of evidence. Contracting Authorities must be able to provide a
reason for any reason that equivalence does not exist in a given case. There
are also international agreements on standardization which aim to ensure the
interoperability of the armed forces and which can have the force of law in
Member States. Should one of these agreements apply, the Contracting
Authorities/Entities may demand that tenders comply with the standards
described in that agreement. The technical specifications should be clearly
indicated, so that all tenderers know what the requirements established by
the Contracting Authority/Entity cover.149
● Types of Specifications. There are two basic types of specifications, technical
specifications and performance specifications
3:18. Technical Specifications (Article 18(1)-(3)(a)). A technical specification is
defined in Annex III of the Directive.150 Technical specifications are parsed in the
Directive based on the nature of the procurement, e.g., for works, supplies, or services.
● Technical Specifications for Works (Annex III, 1(a)). A technical specification in
the case of works is the totality of the technical descriptions contained in the tender
documents, defining the characteristics required of a material, product, or supply, which
permits a material, product, or supply to be described in a manner that fulfils the use for
which it is intended by the Contracting Authority. These include levels of environmental
performance, design for all requirements (including handicap access and use) and
conformity assessment, performance, safety and dimensions, procedures for quality
assurance, terminology, symbols, testing and test methods, packaging, labeling, and
production processes and methods. Works specifications also address “rules relating to
designs and costing,” test, inspection and acceptance, and prescribed methods of
construction.
● Technical Specifications for Supplies and Services (Annex III, 1(b)). The
specifications for supplies and services define the characteristics of a supply or service
define the required characteristics of a product or service, to include quality and
performance levels, design for all requirements (including handicap access and use),
conformity assessment, performance, use of the product, safety and dimensions,
including “requirements relevant to the product as regards the name under which the
product is sold,” terminology, symbols, testing and test methods, packaging, marking and
labeling, user instructions, production methods and procedures, and conformity
assessment procedures.
149
150
CP. (38)
Art. 18(1)
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● Standards and Terms of Reference in Technical Specifications. Technical
standards are to be set out in the contract documents,151 and are to be such so as to afford
equal opportunity for all economic operators and not to unduly limit competition.152
Technical specifications must allow for equivalents, and a Contracting Authority must
accept an “equivalent” proposal, which might be shown by a technical dossier from the
manufacturer or a test report from a recognized body.153 The Defence Directive
recognizes the following standards:
► Standards (Annex III, ¶2)). These are technical specifications approved by a
recognized standardization body at the international, European, or national level.
► Defence Standard (Annex III, ¶3)). These are usually non-mandatory
standards that are approved by a standardization body specializing in defence technical
specifications.
► European Technical Approval (Annex III, ¶4). This means a favorable
evaluation of a specification by a recognized approval body of a Member State.
► Common Technical Specification (Annex III, ¶5). This is a specification
approved by a Member State and published in the European Union’s Official Journal.
► Technical Reference (Annex III, ¶6). These are specifications for any product
produced by European standardization bodies, other than official standards.
● Brand Name Technical Specifications (Article 18(8)). A specification that
describes the requirement by brand name (“specific make or source”) is permitted only if
there is a sufficiently precise description is not possible, even by references to
performance. In those cases, the Contracting Authority must allow for an equivalent.
● Orders of Precedence in Technical Specifications (Article 18(3)(a)). Without
superceding specifications or requirements set by national law, the Directive sets an order
of precedence for the employment of specifications. The order of precedence is national
civil standards that transpose European standards; European technical approvals;
common civil technical specifications; national civil standards transposing international
standards; other technical reference systems established by European standardization
bodies (if none, other national civil standards, national technical specifications, or
national technical specifications); civil technical specifications based on industry
practices and standards; and national defence standards.
3:19.
Performance Specifications (Article 18(3)(b) and 18(5)).
Performance
specifications are based on functional requirements, but must be specific enough to
151
Art. 18 (1) and CP. (39)
Art. 18 (2)
153
Art. 18(4)
152
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permit tenderers to propose and for Contracting Authorities to evaluate. Performance
specifications may reference technical specifications, if that would lend to better
clarification.154 Tenders that satisfy an acceptable standard cannot be rejected if that
standard meets the performance standard. In all cases, the burden is on the tenderer to
establish that its proposal is compliant.155
3:20. Other Conditions for Performance (Article 20). In addition to the standard
forms of works, supply, or service specifications, Contracting Authorities may set other
standards provided they are consistent with European Community standards. Examples
of these are conditions pertaining to subcontracting, security, environmental standards,
and compliance with social preference programs. In regard to social preferences,
contracts under the Defence Directive may be reserved for sources, most of whose
employees are handicapped or disabled.156
Contracting Procedures
3:21. Contracting Procedures (Articles 25-29). Each Member State has its own
contracting procedures. They are very similar, but European Union membership requires
that every Member State’s national rule be consonant with the mandatory features of the
applicable Directive.157
● The Four Basic Defence Contracting Procedures. There are four contracting
procedures mentioned in the Defence Directive: the Restricted Procedure, Negotiated
Procedures with and without Publication of a Contract Notice, and the Competitive
Dialogue, which receives the most detail in the Directive. The Competitive Dialogue and
Negotiation without Publication of a Contract Notice can be used only in certain
circumstances.158
● No Open Procedures. The Open Procedure in EU public procurement is where
any economic operator can submit a tender.159 It is not listed as a procedure in the
Defence Directive.
● Unrestricted Choice of Either Restricted Procedure or Negotiated Procedure
with Publication of a Contract Notice. Of note, the Defence Directive allows the
Contracting Authority to use either the Restricted or the Negotiated Procedure with
Publication of a Contract Notice.160 As the Coordinating Provisions explain:
154
Art. 18(3)(c) and 18(3)(d)
Art. 18(5)
156
Art. 14. Contract opportunities making this reservation are to reference the authority of the Directive,
Art. 14, ¶2
157
Art. 25
158
Art. 25, ¶3 and ¶4, respectively
159
2004/18/EC, Art. 1(11)(a))
160
CP. (47). The Defence Directive is much more flexible in this regard than the EU Public Directive,
2004/18/EC
155
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The contracts covered by the Defence Directive are characterized by
specific requirements in terms of complexity, security of information or
security of supply. Extensive negotiation is often required to satisfy these
requirements when awarding contracts. As a result, the Contracting
Authorities/Entities may use the Negotiated Procedure with the
Publication of a Contract Notice, as well as the Restricted Procedure, for
contracts covered by this Directive.161
● Limiting the Number of Competitors. The number of candidates with whom the
Contracting Authority/Entity will invite in the Restricted procedure, Negotiated
Procedure with Publication of a Contract Notice, and Competitive Dialogue, can be
limited by the Contracting Authority/Entity at the outset. If so, the objective basis to be
applied in selecting candidates must be included in the contract notice.162
● Successive Steps. The Negotiated Procedure and Competitive Dialogue may be
may be conducted in successive stages that eliminate tenderers as the Contracting
Authority moves towards the final selection of a contractor.163 If this process is to be
employed, it must set out in the contract notice. As the Coordinating Procedures explain,
in view of the high level of complexity and the cost of the tendering process, Contracting
Authorities/Entities should be able to conduct these two procedures in successive stages
in order to “gradually reduce” the number of tenderers with which it will progress to
discuss or negotiate. This reduction, however, should be conducted so as to maintain
genuine competition.164
3:22. Restricted Procedures (Article 1 (19) Article 25, ¶2). In the restricted procedure,
any economic operator may request to tender in response to the Contracting Authority’s
Article 30(2) notice. Those who do are now “candidates.”165 Their requests or
applications are evaluated, and those selected by the Contracting Authority are invited to
submit tenders.166 The Restricted Procedure in the EU is characterized by the absence of
negotiating with the tenderers, and it therefore may not be the best for complex defense
purchases. For this reason, perhaps, the restricted procedure is not discussed in the
Defence Directive, other than in the Definitions167 and in the Directive’s list of
recognized procedures.168
3:23. Negotiated Procedures with Publication of a Contract Notice (Article 26). In
this negotiated procedure, any economic operator, in response to the contracting
Authority’s Article 30(2) notice, can request to participate. Those who do are
161
162
163
164
165
166
167
168
CP. (47)
CP. (62)
Art. 26(3)
Art. 63
Art. 1(15)
Art 1(19)
Art 1(19)
Art. 25, ¶2
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“candidates.”169 The Contracting Authority reviews the requests, and selects those who
are invited to engage in negotiations,170 during which the parties negotiate in order to
arrive at tenders that satisfy the contract requirements, and from which the Contracting
Authority will select the best tender in accordance with the announced award criteria.171
Contracting Authorities must negotiate with tenderers equally, and may not give any
party an improper advantage, such as providing unequal information.172
3:24. Competitive Dialogue (Article 27). The Competitive Dialogue procedure is
reserved for cases where the Contracting Authority determines that the Restricted
Procedure and the Negotiated Procedure with Publication of a Contract Notice are not
adequate.173 As the Coordinating Provisions explain:
Contracting Authorities/Entities which carry out particularly complex
projects may, without any fault of their on their part, find it objectively
impossible to define the means of satisfying their needs or to assess what
the market can offer in the way of technical solutions and/or financial or
legal solutions. This situation may arise in particular in the case of
projects requiring the integration or combination of several technological
or operational capabilities, or projects involving complex or structured
financing, the financial and legal make up of which cannot be defined in
advance. In this case, use of the Restricted Procedure and Negotiated
Procedure with Publication of a Contract Notice would not be feasible, as
it would not be possible to define the contract with enough precision to
allow candidates to draw up their offers. It is therefore necessary to
provide for a flexible procedure ensuring competition between economic
operators and allowing the Contracting Authorities/Entities to discuss all
aspects of the contract with each candidate. However, this procedure must
be used to in such a way so as not to restrict or distort competition,
particularly by altering any fundamental aspect of the tender, by imposing
substantial new requirements on the successful tenderer, or by involving
any tenderer other than the one selected as the most economically
advantageous.174
The Competitive Dialogue process commences with the publication of a notice setting
forth the Contracting Authority’s needs and requirements, as best as they can be
defined.175 Those candidates who satisfy the basic qualification standards176 are invited
to dialogue with the Contracting Authority regarding the best way to satisfy the
169
170
171
172
173
174
175
176
Art. 1(15)
Art. 1(20)
Arts. 1(20) and 26(1)
Art. 26(2)
Art. 27(1)
CP. (48)
Art. 27(2)
See Arts. 38 to 46
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requirement,177 with consideration that the contract award will be made to the most
economically advantageous tenderer.178 As in any negotiated procedure, the Contracting
Authority dialogues with each tenderer individually, and must treat all equally and
without providing any undue advantage,179 or revealing one tenderer’s solution or
proprietary information to another.180 Also, as in a standard negotiated procedure, the
process of tenderer selection in a Competitive Dialogue may occur through a down-select
process, provided that the contract notice advises that this procedure will be used. 181 As
the process of dialogue continues, it addresses price and payment issues,182 as well as the
technical aspects of the proposal, until the Contracting Authority identifies “the solution,
or solutions, if necessary after comparing them, that are likely to satisfy the government’s
needs.” (emphasis added).183 Once this occurs, the Contracting Authority “declare[s] that
the dialogue is concluded,” and asks for the submission of “final tenders,” on the
discussed solutions, which final tenders must meet all the elements in order to satisfy the
requirement.184 The Directive specifies that the Contracting Authority may ask that final
tenders be “clarified, specified, and fine-tuned,” by tenderers, or that tenderers provide
“additional information” after tenders have been submitted, but that this cannot result in
“changes to the basic features of the tender” that “distort competition or have a
discriminatory effect.”185 When the tenders are submitted, and all post-tender
communications are over, the Contracting Authority selects the most economically
advantageous tender in accordance with the award criteria set forth in the original
notice.186 Of interest, the Directive provides that after the selection of the winning
tender, the Contracting Authority may engage in dialogue with the contractor to “clarify
aspects of the tender or confirm commitments contained in the tender,” provided that this
does not have the effect of modifying substantial aspects of the tender or call for tenders,
and does not risk distorting competition or causing discrimination.”187
3:25. Negotiated Procedure Without Publication of a Contract Notice (Article 28).
This procedure involves little or no competition. Therefore the Defence Directive gives
detailed guidance as to when this procedure may be used. As the Coordinating
Provisions state:
Use of Negotiated Procedures with Publication of a Contract Notice could
be impossible or entirely inappropriate in certain exceptional
177
Art. 27(3)
Art. 27(1), ¶2
179
Art. 27(3), ¶2
180
Art. 27(3), ¶3
181
Art. 27(4) and CP. (63)
182
Art. 27(8)
183
Art. 27(5). Note that the process of Competitive Dialogue need not result in a final phase of
competition over just one solution. Different tenderers’ different solutions can be considered in the final
stage of the process for award.
184
Art. 27(6)
185
Art, 27(6), ¶2
186
Art. 27(7)
187
Art. 27(7), ¶2
178
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185
circumstances. The Contracting Authorities/Entities should thus, in
certain very specific cases and circumstances, be able to use the
Negotiated Procedure without Publication of a Contract Notice.188
Certain circumstances should be partly the same as those provided for in
Directive 2004/18/EC. In this respect, consideration should be given in
particular to the fact that defence and security equipment is often
technically complex. Consequently, incompatibility or disproportionate
technical difficulties in operation and maintenance justifing the use of the
Negotiated Procedure without Publication of a Contract Notice in the case
of supply contracts for additional deliveries should be assessed in the light
of this complexity and the associated requirements for interoperability and
standardization of equipment [sic]. This is the case, for example, for the
integration of new components into existing systems or for the
modernization of such systems.189
● Circumstances that Permit the Use of the Negotiated Procedure without
Contract Notice
► After Failed Competition (Article 28(1)(a)&(b)). For works, supply, and
service contracts, the procedure may be used when there were no tenders/applications, or
no suitable (or legally-acceptable) tenders/applications, submitted under a Restricted
Procedure, Negotiated Procedure with Publication of a Contract Notice, or Competitive
Dialogue, provided that the contract to be negotiated under Article 28 is “substantially”
the same as those under the unsuccessful competition.
► Urgency Arising from a Crisis (Article 28(c)). The procedure may be used
when the time periods required for the Restricted Procedure or Negotiated Procedure with
Publication of a Contract Notice are incompatible with an urgency during a “crisis.”190
As the Coordinating Provisions advise:
The armed forces of Member States may, for example, be called upon to
intervene in crisis situations abroad, for instance as a part of peacekeeping operations. At the launch or during the course of such an
intervention, the security of Member States and their armed forces may
necessitate the award of certain contracts at a speed that is incompatible
with the usual deadlines imposed by the award procedures laid down in
this Directive. Such emergencies could also arise for the security forces,
188
CP. (50)
CP. (51)
190
A “crisis” is defined in Art. 1(10) as “any situation in a Member State or third country in which a
harmful event has occurred which clearly exceeds the dimensions of harmful events in everyday life and
which substantially endangers or restricts the life and health of people, or has a substantial impact on
property values, or requires measures in order to supply the population with necessities; a crisis shall also
be deemed to have arisen if the occurrence of such a harmful event is deemed to be impending; armed
conflicts and war shall be regarded as crises.”
189
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186
for example, in the case of a terrorist attack on the territory of the
Union.191
► Urgency from Other-Than a Crisis (Article 28(d)). The procedure may be
used where it is “strictly necessary” because unforeseeable events have created an
“extreme urgency” to make a contract award outside the time requirements of the
Restricted Procedure and Negotiated Procedure with Publication of a Contract Notice.
The Directive specifies that this urgency cannot be attributable to the Contracting
Authority (e.g., a lack of advance acquisition planning).
► Technical Necessity (Article 28(e)). The procedure may be used in cases
where only one source is technically capable or has the proprietary ability to execute the
contract. The Coordinating Provisions provide this guidance:
It may be the case for certain purchases within the scope of this Directive
that only one economic operator is able to execute the contract because it
holds exclusive rights, or for technical reasons. In such cases, the
Contracting Authority/Entity should be allowed to award contracts or
framework agreements directly to that economic operator. However,
technical reasons for only one economic operator being able to execute a
contract should be rigorously defined and justified on a case-by-case basis.
They could include, for instance, strict technical impracticability for a
candidate other than the chosen economic operator to achieve the required
goals, or the necessity to use specific know-how, tools or means which
only one operator has at its disposal. This may be the case, for example,
for the modification or refitting of particularly complex equipment.
Technical reasons may also derive from specific interoperability or safety
requirements, which must be fulfilled in order to ensure the functioning of
the armed forces or security forces.192
► Research and Development Contracts (Article 28(2)). The procedure is
available for those research and development contracts that are subject to the Directive
(i.e., not excluded under Article 13(j)), and the products are manufactured purely for
research and development (i.e., not for purposes of establishing commercial viability or
to recover research and development costs). As the Coordinating Provisions explain,
consistent with Article 163 of the Treaty, the encouragement of research and
development helps to strengthen the scientific and technological basis of European
Community industry, and the “opening up of service contracts contributes to this end.”193
As the Coordinating Provisions further explain, the importance of research and
development in this regard warrants giving the Member States the maximum flexibility in
the award of contracts for, and in support of, research and development. Yet, the
Directive cautions that this flexibility should not preclude competition in the later phases
191
CP. (54)
CP. (52)
193
CP. (34)
192
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of the life cycle of the product, and that research and development contracts should be
exempt from the Directive only to the stage where the maturity of the new technologies
can be “reasonably assessed and de-risked.” Beyond that stage, they should be open to
competition.194 On the other hand, a Contracting Authority may continue with a
contractor into later phases of development if the contract at issue contained such an
option, and was originally awarded through a Restricted Procedure, Negotiated Procedure
with Publication of a Contract Notice, or Competitive Dialogue notice.195
► Technically Sound Follow-On Contracts (Article 28(3)(a)). The procedure
may be used to maintain supply from a source which, if replaced with another vendor,
would result in systemic incompatibilities, or result in “disproportionate technical
difficulties in operation and maintenance.” In these cases, the total length of the extended
contract cannot exceed five years unless there are exceptional circumstances.
► Commodity Market Purchases (Article 28(3)(b)). The procedure may be
used when purchasing from vendors on a commodity market.
► Singularly Advantageous Terms (Article 28(3)(c)). The procedure may be
used where favorable terms can be obtained from vendors that are “definitely” winding
up business (i.e., going out of business), or from liquidators, creditors, etc.
► Unforeseen Needs to Modify the Original Contract (Article 28(4)(a)).
Where there is an unforeseen need for additional works or services, the non-competitive
procedure may be used to amend or make another award to the original contractor if the
additional effort cannot be technically or economically separated from the original award
without major inconvenience to the Contracting Authority,196 or when such works or
services, although separable from the original contract, are “strictly necessary for its
completion.”197 When this authority is invoked, the aggregate value of the additional
contracts cannot exceed 50% of the original contract.198
► Possible Additional Orders (i.e., Options) Previously Competed (Article
28(4)(b)). If the possibility of additional orders are announced in the original contract
notice, the Contracting Authority may use the procedure to order additional works or
services. The period during which the additional works or services may be ordered
cannot be for more than five years after the end of the original contract period.199
► Air or Maritime Transport for Deploying Forces (Article 28(5)). The
procedure is available to procure short-term air or maritime services for military or
security forces deploying outside the Member State, and the lead-time requirements of
194
CP. (55)
CP. (55)
196
Art. 28(4)(a)(i)
197
Art. 28(4)(a)(ii). This reason seems questionable for two reasons: 1) the “strictly necessary” criteria is
encompassed in 28(4)(a), and the fact the work is separable counsels against a sole source preference.
198
Art. 28(4)(II), 2nd
199
Art. 28(4)(b), 3rd
195
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the Restricted Procedure, or Negotiated Procedure with Publication of a Contract Notice,
are incompatible with the urgency.
● Notice of the Use of the Procedure. The use of the procedure must be justified in
the notice of the actual contract award.200
3:26. Other Procurement Solutions and Options.
structuring or managing contract support.
The following are ways of
● Framework Agreements (Article 1(11) and Article 29). A framework agreement
is an agreement - not an actual contract. It is reached between a Contracting Authority
and one or more candidates, after a competitive procedure, for the purpose of agreeing on
the terms that will govern subsequent contract orders that might awarded by the
Contracting Authority during the framework agreement period. The agreement will
address price and quantity.201 However, a framework agreement does not obligate the
Contracting Authority to “place an order,” “make a call,” or award a contract against the
agreement.
► Competition and Procedures in the award of Framework Agreements.
Framework agreements may not be used to restrict or avoid competition,202 and are to be
awarded consistent with the general principles of procurement (i.e., transparency, equal
treatment, etc.). Members States enter into framework agreements using the procedures
of the Directive.203 As the Coordinating Provisions state:
…a Contracting Authority/Entity enters into a Framework Agreement in
accordance with the provisions of this Directive relating, in particular, to
advertising, time-limits and conditions for the submission of tenders,…204
Once framework agreements have been reached, orders under the agreement can be
placed only with economic operators that are properly admitted to the agreement,205 and
only for the works, supplies, or services that are covered by the agreement.206
Framework agreements are usually made with several contractors, in which case there
must be at least three, unless there are not three qualified contractors available.207
Contracts under framework agreements which have more than one contractor may be
awarded without further competition in accordance with the terms of the Agreement.208
200
201
202
203
204
205
206
207
208
Art. 28. The notice is in accordance with Art. 30(3).
Art. 1(11)
Art. 29(2), ¶6
Art. 29(1), (2) and (2) ¶2
CP. (21)
Art. 29(2), ¶2
Art. 29(2), ¶3 and 29(3)
Art. 29(4)
Art. 29(4), ¶2, first condition
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Framework agreements may be made with just one contractor,209 in which case the
Contracting Authority may require the contractor to supplement its tender, as needed.210
► The Term of Framework Agreements. The term of a Framework Agreement
may not exceed seven years, but for exceptional cases,211 in which case the Contracting
Authority must publish a justification in accordance with the notice requirements of the
Directive.212
► Incomplete Framework Agreements. Because of the nature or subject matter
of the framework agreement, it is possible that an agreement might not contain all of the
terms needed to place an effective contract order. When that is the case, the specific
terms for an individual order are drawn up and those admitted under the agreement are
afforded adequate time to prepare a proposal which is evaluated by the Contracting
Authority for selection to receive the order.213 As the Coordinating Provisions state:
…if not all the terms have been fixed in advance, by reopening
competition between the parties to the framework agreement. The
reopening of competition should comply with certain rules, the aim of
which is to guarantee the required flexibility and compliance with the
general principles, in particular the principle of equal treatment.214
● Electronic Auctions (Article 48). This is a process within a recognized procedure
(e.g., Negotiated Procedure with Publication of a Contract Notice), to include procedures
that lead to a framework agreement, to conduct competition on matters such as price and
other very objective quantifiable aspects of the requirements.215 The auction is held after
the Contracting Authority has evaluated the eligibility and qualifications of the
competing vendors. The determining factor for the award of the resulting contract may
be either low price or most economically advantageous.216 The use of an auction must be
announced in the contract notice, as well as all relevant information, to include an
explanation as to how the auction will be conducted,217 which is typically in successive
rounds. The tenderers’ prices are submitted simultaneously,218 and during each round the
tenderers are given enough information to ascertain their relative ranking. 219 The
209
Art. 29(3)
Art. 29(3), ¶2
211
Art. 29(2), ¶4 and CP. (21). Factors to be considered include service life, installations or systems, and
the difficulties of changing suppliers.
212
Art. 29(5). See Art. 30(3) regarding notice.
213
Art. 29(4), ¶2, second condition (a) through (d)
214
CP. (21)
215
Art. 48(1) and (2)
216
Art. 48(2), 3rd -1 and -2 and Art. 5. In other words, the auction process can be used to determine the
prices that will be a part of the final tender when selection will be made to the most economically
advantageous tender.
217
Art. 49(3)
218
Art. 49(4), ¶2
219
Art. 49(6)
210
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Contracting Authority may reveal the number of participants in the auction, but not their
identity.220 The Contracting Authority will indicate the manner for concluding the
auction.221 While the Directive cautions that auctions cannot be used to “prevent, restrict,
or distort competition,”222 the method appears to be very transparent and competitive. On
the other hand, the method is appropriate only where the technical specifications are very
clear and commercial in nature, and might not be suited for complex or major defence
and security – related procurements. The Coordinating Provisions provide extensive
comments on the use of electronic auctions:
Contracting Authorities/Entities may make use of electronic purchasing
techniques, providing that such use complies with the rules drawn up
under this Directive and with the principles of equal treatment, nondiscrimination, and transparency. Since the use of the technique of
electronic auctions is likely to increase, such auctions should be given a
Community definition governed by specific rules in order to ensure that
they operate in full accordance with those principles. To that end,
provision should be made for such electronic auctions to deal only with
contracts for works, supplies, or services for which specifications can be
determined with precision. Such may in particular be the case for
recurring supplies, works, and service contracts. With the same objective,
it must also be possible to establish the respective ranking of the tenderers
at any stage of the electronic auction. Recourse to electronic auctions
enables Contracting Authorities/Entities to ask tenderers to submit new
prices, revised downwards, and when the contract is awarded to the most
economically advantageous tender, also to improve elements of the
tenders other than prices. In order to guarantee compliance with the
principle of transparency, only the elements suitable for automatic
evaluation by electronic means, without any intervention and/or
appreciation by the Contracting Authority/Entity, may be the object of
electronic auctions, that is, only the elements which are quantifiable so
they can be expressed in figures or percentages. On the other hand, those
aspects of tenders which imply an appreciation of non-quantifiable
elements should not be the object of electronic auctions. Consequently,
certain works contracts and certain service contracts having as their
subject matter intellectual performances, such as the design of works,
should not be the subject of electronic auctions.223
● Central Purchasing Bodies (Article 1(18) and Article 10). Member States may
make purchases of works, supplies, or services from, or through, Central Purchasing
220
Art. 49(6)
Art. 49(7)
222
Art. 49(8)
223
CP. (22)
221
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Bodies.224 Purchases properly made from or through a Central Purchasing Body are
deemed to be compliant with the Defence Directive.225
3:27. Award Criteria (Article 47)
● Two Criteria. The Directive recognizes two criteria for the award of a contract,
“lowest price only,”226 and “most economically advantageous.”227 As the Coordinating
Provisions state:
Contracts should be awarded on the bases of objective criteria which
ensure compliance with the principles of transparency, non-discrimination
and equal treatment, and which guarantee that tenders are assessed in a
transparent and objective manner under conditions of effective
competition. As a result, it is appropriate to allow the application of two
award criteria only, “the lowest price,” and the “most economically
advantageous tender.”228
● Considerations in Applying the Most Economically Advantageous Criteria. In
the case of most economically advantageous tender, the Directive cites, in addition to
price, criteria such as quality, technical merit, functional and environmental
characteristics, running and life cycle costs, cost-effectiveness, after-sales service and
technical assistance, delivery date and delivery period or period of completion, security
of supply, interoperability, and operational characteristics.
● Weighting the Criteria. The Contracting Authority is required to provide the
relative weighting of the criteria in the notice documents, or, if weighting is impractical,
the descending order of importance for the criteria.229 As the Coordinating Provisions
explain:
To ensure compliance with the principle of equal treatment in the award
of contracts, it is appropriate to lay down an obligation, which has been
established by case law, to ensure the necessary transparency to enable
ternderers to be reasonably informed of the criteria and arrangements
which will be applied to identify the most economically advantageous
tender.
It is therefore the responsibility of the Contracting
Authorities/Entities to indicate the criteria for award of the contract and
the relative weighting given to each of the criteria, in sufficient time for
tenderers to be aware of them when preparing their tenders. Contracting
224
Art. 10(1)
Art. 10(2), ¶2. In those cases where the CPB is itself not a Contracting Authority, other Contracting
Authorities may purchase from or through the CPB if the CPB has acted in accordance with the Directive
and its actions are subject to the Directive’s remedies, Art. 10(2), ¶3.
226
Art. 47(1)(b)
227
Art. 47,1(a)
228
CP. (69)
229
Art. 47 (2)
225
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Authorities/Entities may derogate from indicating the weighting of
criteria for the award in duly justified cases for which they must be able
to give reasons for where the weighting cannot be established in
advance, in particular on account of the complexity of the contracts. In
such cases, they must indicate the descending order of the importance of
the criteria.230
● Applying the Criteria. As the Coordinating Provisions state:
Where the Contracting Authorities/Entities choose to award a contract to
the most economically advantageous tender, they shall assess the tenders
in order to determine which one offers the best value for money. In
order to do this, they shall determine the economic and quality criteria
which, taken as a whole, must make it possible to determine the most
economically advantageous tender for the Contracting Authority/Entity.
The determination of these criteria depends on the object of the contract,
since they must allow the level of performance offered by each tender to
be assessed in light of the object of the contract, as defined in the
technical specification, and the value for money of each tender to be
measured.231
Communications in the Procurement Process, Submission of Requests to Tender
and Tenders, and Other Communications
3:28. Methods of Communication (Article 36(1)). Communications may be made by
mail, facsimile transmission, electronic means, or, in some cases, by telephone. The
authorized or required means of communication must be those commonly available.232
Requests to participate may be made by written or telephonic communication.233
3:29. A Preference for Electronic Communication. The Defence Directive continues
the EU’s preference to streamline the tendering process by using electronic
communication, as long as it is consistent with the transmission standards of the
European Community.234 As to electronic communication, the Directive prescribes
standards so as to insure that common means are employed, or when non-ordinary
requirements are imposed (e.g., encryption or electronic signatures), parties receive
adequate guidance.235
3:30. Communication Standards. Annex VIII of the Directive establishes mandatory
standards for electronic communication methods and features. The items addressed
230
231
232
233
234
235
CP. (70)
CP. (71)
Art. 36(2) and 36(4)(electronic)
Art. 36(6)
CP. (60)
Art. 36(5)
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include electronic signatures;236 the ability to determine when communications were
received;237 the security of the information submitted,238 access controls at the
Contracting Authority’s facilities,239 and the ability to detect unauthorized access;240 and
provisions to ensure simultaneous access by vendors (i.e., for electronic auctions).241
3:31. Invitations to Tender, Negotiate, or Participate in Dialogue (Article 34). In the
Restricted Procedure, Negotiated Procedure with Publication of a Contract Notice, or
Competitive Dialogue, the Contracting Authority is required to simultaneously invite
selected candidates to tender, negotiate, or take part in the competitive dialogue.242
3:32. Content of Invitations. The Directive specifies the minimum content of the
notice or invitations.
► Technical Information. The Directive specifies that this communication is to
include all the technical documents needed to tender, either in the communication or by
reference to where they can be obtained electronically,243 to include information in the
possession of third parties.244
► Other Information. In addition to technical information and specifications,
the invitation is required to include reference to the contract notice, the deadlines for the
submission of tenders, the place for submission, and the language of the tender (in the
case of the competitive dialogue, this information will advise on the date and place to
commence dialogue, and the applicable language); information on the submission of
supplemental information that might be needed pertaining to the tenederer’s
qualifications; and, if not already in the contract notice, the factors in the award criteria
and the relative weighting of those factors or their descending order of importance. 245 If
a tenderer makes a timely request for additional information from the Contracting
Authority, that must be provided at least six days before tenders are due. 246 In regard to
information in the notice and tendering documents, the Directive stresses the importance
236
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(a)
237
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(b)
238
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(c)
239
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(e) and (h)
240
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(d)
241
Annex VIII, Requirements Relating to Devices for the Electronic Receipt of Requests to Participate
and Tenders, ¶(f) and (g).
242
Art. 34(1)
243
Art. 34(2)
244
Art. 34(3)
245
Art. 34(5)
246
Art. 34(4)
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of advising vendors of the qualifications they will have to demonstrate.
Coordinating Provisions explain:
As the
Verification of the suitability of candidates and the selection thereof
should be carried out in transparent conditions. For this purpose, nondiscriminatory criteria should be indicated which the Contracting
Authorities/Entities may use when selecting competitors and the means
which economic operators may use to prove that they have satisfied those
criteria. In the same spit of transparency, the Contracting Authority/Entity
should be required, as soon as a contract is put out to competition, to
indicate the selection criteria it will use and the level of specific
competence it may, where appropriate, demand of economic operators
before admitting them to the procurement procedure.247
As the Coordinating Provisions further state:
The detailed technical specifications and additional information
concerning contracts must, as is customary in the Member States, be given
in the contract documents for each contract, or in an equivalent
document.248
3:33. Time Limits for the Receipt of Requests to Participate and for the Receipt of
Tenders (Article 33). Economic operators that wish to participate, and therefore need to
submit a request, and those who have been selected to submit tenders, must be given
adequate time to evaluate the requirements in order to compose adequate requests or
tenders. Adequate and equal time for all participants is an essential element of fair
procurement, and in setting that time, while there are minimum limits in the Directive,
the Contracting Authority must establish the time limit in each case with consideration to
the complexity of the contract.249 In that regard, the Directive requires extending the
established time limits in cases where, for example, the required documents or
information is not promptly available, or the participants need to engage in a site
inspection.250
● The Basic Time Limits (Article 33(2). In Restricted Procedures, Negotiated
Procedures with Publication of a Contract Notice, and the Competitive Dialogue, the
minimum time between the publication of the required notice and the receipt of requests
to participate is 37 days.251 In the case of Restricted Procedures, the minimum time limit
247
CP. (61)
CP. (39)
249
Art. 33(1)
250
Art. 33(6)
248
251
Where the Contracting Authority has employed electronic means to communicate notice this may be
reduced by 7 days, Art. 33(4).
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for the receipt of tenders is 40 days.252 However, if the Contracting Authority has made
direct and unrestricted access electronic access to required documents available, the
respective 37 and 40 day minimum limits may be reduced by 5 days.253
● Shortened Time Limits (Article 33(7)). In the case of Restricted Procedures or
Negotiated Procedures with Publication of a Contract Notice, if urgency requires, the
time limit for the receipt of requests to participate may be shortened to 15 days from the
dispatch of contract notice, or to 10 days if dispatch was made electronically. 254 In the
case of Restricted Procedures, the time for the receipt of tenders may be reduced because
of an urgency to 10 days.255
3:34. Evaluation of Candidates and Tenders. The overall scheme of evaluation of the
participants in a contract or framework action begins with a determination as to whether
they should be excluded,256 and that they have the necessary technical or professional
licenses or accreditations.257 This involves determining if the candidate/tenderer has the
requisite “minimum capacity” of financial258 and technical resources,259 which may
include quality control260 and environmental management261 standards. Submissions
from candidates or tenderers on these matters are subject to the Contracting Authority’s
requests for clarification or additional information.262
3:35. Minimum Qualifications of Contractors. Contracting Authorities may require
candidates to satisfy certain minimum criteria, such as financial and technical ability
(discussed below) and other matters, which criteria must be selected by the Contracting
Authority proportionately to the subject matter of the contract. 263 These criteria must be
clearly set out in the contract notice.264
● Financial Standing (Article 41). The Directive provides methods by which a
contractor may demonstrate its economic condition.265 This non-exclusive list of
methods includes references from financial institutions, risk indemnity insurance,
252
Art. 33(2), ¶2. This may be shortened to 36 but no less than 22 days from the date the invitation was
sent, in cases where the Contracting Authority has published a “prior information notice,” Art. 33(3)
¶1&¶2. The prior information notice must contain all the required information for a notice, and had to have
been published at least 52 days before the contract notice was published, Art. 33(3) ¶3.
253
Art. 30(5) ¶1&¶2
254
Art. 33(7) 1st
255
Art. 33(7) 2nd
256
Art. 39
257
Art. 40
258
Art. 41
259
Art. 42
260
Art. 43
261
Art. 44
262
Art. 45
263
Art. 38(2)
264
Art. 38(2), 3rd
265
Art. 41(1)
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accounting records and balance sheets, and a statement of the contractor’s “overall
turnover” for up to the last three financial years.266 A contractor may also satisfy the
Contracting Authority on this issue by reference to resources it has enlisted for the
execution of the contract, regardless of the legal relationship between them,267 and
members of a consortium may rely on each other other’s capacity in this regard. 268 The
Directive requires the Contracting Authority to indicate in the contract notice the type of
information it desires on the issue of financial standing, 269 but, as if the Directive were
not already liberal on this point, it states that if the desired information is not available,
any information that satisfies the Contracting Authority is sufficient.270
● Technical or Professional Ability (Article 42). The Defence Directive provides
extensive guidance on this matter. It list several ways a contractor may demonstrate its
technical ability. These include the following:
► Past Performance. This is a report from the contractor on its work, deliveries,
and services over the past five years, and the details of this work, to include “certificates
of satisfactory execution,” or some other sort of positive reference or certification by the
public or private sector customer.271
► Key Personnel or Resources. The contractor may be asked to identify the
personnel or organizations that it will employ or otherwise rely on to perform the
contract. In this regard, the Contracting Authority can consider whether such human
resources are the contractor’s employees or contracted,272 and whether possess the
requisite technical,273 management,274 and quality control skills,275 and the necessary
education and professional certification. In that regard, the relevant rules on the mutual
recognition of diplomas, certificates or other evidence of formal qualifications apply
when evidence of a particular qualification is required.276
Contracting
Authorities/Entities can also require information on the contractor’s staffing and workerto-manager ratios for the last three years.277 As to physical capacity and facilities, the
Contracting Authority can require information on the contractor’s technical facilities and
its ability to manage intellectual property,278 and its tools, materials, and technical
266
Art. 41(1)(a)-(c)
Art. 41(2)
268
Art. 41(3)
269
Art. 41(4)
270
Art. 41(5)
271
Art. 42(1)(a)
272
Art. 42(1)(b)
273
Art. 42(1)(b) and 42(4)[pertaining to installation skills]
274
Art. 42(1)(b) and (1)(e). This includes environmental management, Art. 42(1)(f), in which case the
Contracting Authority may require certifications of compliance with European standards, Art. 44.
275
Art. 42(1)(b). The Contracting Authority may require quality control certifications based on European
standards, Art. 43
276
CP. (64)
277
Art. 42(1)(g)
278
Art. 42(1)(c)
267
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equipment.279 In cases where the contractor has, or proposes, resources and facilities
outside the purchasing Member State, the Contracting Authority may require satisfactory
proof of the contractor’s capacity and plans to execute the contract in cases of “crisis.”280
Also, the Directive permits the Contracting Authority to commission its own survey of
the prospective tenderer’s facilities and quality control measures.281
As to supply contracts, the Contracting Authority may require information such as
samples, descriptions, photographs, or certificates from recognized quality control
institutes or laboratories.282 Guidance for satisfying the requirements for handling
classified information and security is also provided.283 Contractors may rely on the
resources and abilities of other entities, regardless of their legal relationship with them, as
long as they can prove to the satisfaction of the Contracting Authority that they are
reliable resources.284 Likewise, members of consortia can rely on each others’
resources.285 As in the case of other qualifications or criteria, the notice of the contract
opportunity must specify what is sought and the form and manner of satisfactory
submissions to address those matters.286
3:36. Approved Contractors (Article 46). The Defence Directive recognizes Member
States’ official lists of approved contractors.287 A candidate or tenderer admitted to such
a list may submit this as proof of its qualifications to participate in a contract or
framework competition.288 This certification is to be a presumption of qualification as to
the matters covered by the certification,289 which cannot be questioned by the Contracting
Authority without reason.290
3:37. Excluded Contractors (Article 39). Contractors may be excluded from the
competition for award on the basis of non-contract capability issues, such as convictions,
misconduct, or some other form of legal non-compliance. As the Coordinating
Provisions explain:
The award of contracts to economic operators which have participated in a
criminal organization or which have been found guilty of corruption or
fraud to the detriment of the financial interest of the European
Communities, money laundering, the financing of terrorism or terrorist279
280
281
282
283
284
285
286
287
288
289
290
Art. 42(1)(h)
Art. 42(1)(h)
Art. 42(1)(d)
Art. 42(1)(i)
Art. 42(1)(j)
Art. 42(2)
Art. 42(3)
Art. 42(2), ¶3 and Art. 42(5)
Art. 46(1)
Art. 46(2)
Art. 46(3)
Art. 46(4)
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related offenses, should be avoided. Where appropriate, the Contracting
Authorities/Entities should ask candidates or tenderers to supply relevant
documents and, where they have doubts concerning the personal situation
of a candidate or tenderer, may seek the cooperation of the competent
authorities of the Member State concerned. Such economic operators
should be excluded as soon as the Contracting Authority/Entity has
knowledge of a judgment concerning such offenses rendered in
accordance with national law that has the force of res judicata. If national
law contains provisions to this effect, non-compliance with procurement
legislation on unlawful agreements, which has been the subject of a final
judgment or a decision having equivalent effect, may be considered an
offense concerning the professional conduct of the economic operator
concerned or grave misconduct. It should be possible to exclude
economic operators if the Contracting Authority/Entity has information,
where applicable provided by protected sources, establishing that they are
not sufficiently reliable so as to exclude risks to the security of the
Member State. Such risks could derive from certain features of the
products supplied by thee candidate, or from the shareholding structure of
the candidate.291
● Bases for Exclusion (Article 39)
► Exclusion Based on Conviction by Final Judgment for Criminal Conduct
(Article 39(1)). A conviction by final judgment for the following reasons requires
exclusion: participation in a criminal organization;292 corruption;293 fraud;294 terrorist
offenses or offenses linked to terrorist activities;295 and money laundering.296 The
Directive counsels the Member States to implement this provision in accordance with
their national laws, “having regard for Community Law.”297 These bases for exclusion
apply to both business organizations and to individuals.298 Contracting Authorities may
ask candidates to provide assurances and proof where there are any doubts, and they are
encouraged to seek the assistance of the applicable Member States in obtaining
information and making exclusion determinations.299 As in many other matters, Member
States may derogate from an otherwise required exclusion for “overriding requirements
in the general interest.”300
291
CP. (65)
As defined in Art. 21(1) of Joint Action 98/733/HA (21 December 1998)
293
As defined in Art. 3 of the Act of 26 May 1997 and Art. 2(1) of Framework Decision 2003/568/HA(22
July 2003)
294
Within the meaning of Art. 1 of the Convention Relating to the Protection of the Financial Interests of
the European Communities.
295
As defined in Articles 1 and 3 of Framework Decision 2002/475/HA (13 June 2002)
296
As defined in Art. 1 of Directive 2005/60/EC (26 October 2005)
297
Art. 39(1) ¶2
298
Art. 39(1) ¶4
299
Id.
300
Art. 39(1) ¶3
292
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► Exclusion Based on Other Reasons (Article 39(2)). The following conditions
and circumstances are non-mandatory bases for exclusion: bankruptcy or being in the
process of bankruptcy, or under a court administration and an arrangement with
creditors;301 conviction in a proceeding that has the status of res judicata of an offense
against professional conduct or obligations such as, for example, infringements of
legislation concerning export licensing requirements;302 “grave professional misconduct,”
such as, for example, non-compliance with security obligations in a previous contract,
which misconduct can be proven by any means available to the Contracting Authority;303
a determination by the Contracting Authority, based on any available information (to
include information from protected sources) to pose a security risk;304 failure to meet
obligations concerning the payment of social insurances and taxes;305 and “serious
misrepresentation” in supplying information regarding its status and conduct.306 As in
matters of exclusion based on convictions, the Directive cautions the Member State to
implement these rules in accordance with the Member State’s national laws, and having
regard for Community law.307
Certificates of Proof (Article 39(3) and (4). The Directive speaks of establishing
competent authorities in the Member States that can issue certificates regarding the status
of a person or economic operator regarding matters pertaining to exclusion.
Evaluation Topics
3:38. Confidentiality of Information Submitted by Economic Operators (Article 6).
Contracting Authorities, in conformity with their national law, are required to control
access to information designated by economic operators as confidential, e.g., information
that constitutes a trade secret or other proprietary data.
3:39. Variant Proposals (Article 19). Where the standard for contractor selection is
“most economically advantageous,” Contracting Authorities may permit variant
propsoals.308 The acceptance of such proposals has to be announced in the request for
301
Art. 39(2)(a) and (b)
Art. 39(2)(c). This basis for exclusion is quite broad, for example, it could be a finding by an
appropriate authority that a contractor has conducted its business in contravention of the applicable rules
concerning equal opportunities in employment is a basis for exclusion, See CP. (66), citing 2000/87/EC (27
November 2000) On Occupations, and 77/207/EC (9 February 2000) On the Equal Treatment of Women,
as examples of the type of requirements whose violation would constitute a basis to find an “offense against
professional conduct,” or “grave misconduct.”
303
Art. 39(2)(d)
304
Art. 39(2)(e)
305
Art. 39(2)(f) and (g)
306
Art. 39(2)(h)
307
Art. 39(2), ¶2
308
Art. 19(1)
302
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tenders as well as the minimum factors that would make a variant tender acceptable.309
Only variant tenders that satisfy the stipulated criteria can be taken into consideration.310
3:40. Abnormally Low-Priced Tenders (Article 49). If the Contracting Authority
believes that a proposed price is “abnormally low,” which is not defined in the Directive,
that low tender cannot be rejected without affording the tenderer an opportunity to
explain its pricing.311 The Directive cites some factors that might be relevant to assessing
the price reasonableness of a tender, to include the economics or price-related technical
advantages of the methods employed, labor conditions, and state aid.312 The Contracting
Authority is required to verify the proferred reasons for the low price,313 and, in the case
of state aid, the burden is on the tenderer to demonstrate that such aid is lawful.314 In the
case where a tender is rejected because of illegal state aide, the Contracting Authority is
required to notify the Commission.315
Contractor Selection, Notice of Decisions to Competitors, The “Standstill” Period,
and Public Notice of Contract Award
3:41. Notice to the Competitors of the Contracting Authority Decisions (Article
35(1)). Upon reaching a decision to make an award of a contract or framework
agreement (or not to make any award, or to recommence a re-procedure), the Directive
requires the Contracting Authority to advise candidates/tenderers, in writing, of the
decisions and the reasons therefore, “at the earliest opportunity.”316
3:42. The Standstill Period (Article 57). A contract subject to the Directive cannot be
awarded unless it has been preceded by at least 10 days of Article 35(1) advance notice
(15 days if notice is sent by mail) to the “concerned” tenderers or candidates who are not
going to be selected.317 The communication from the Contracting Authority to the
concerned parties must include a summary of the relevant reasons for the decision.318 The
Contracting Authority may limit the content of the summary to withhold information that
might impede law enforcement, be contrary to public interest, jeopardize defence or
309
Art. 19(2) and (3). If, in the competition for a supply contract, an acceptable variant tender would
satisfy the criterion for a service (or vice versa), that does not prohibit the Contracting Authority from
accepting the variant tender.
310
Art. 19(3), ¶2. Depending on the national rules, a contractor may submit a variant tender in addition to
the standard tender called for in the notice.
311
Art. 49(1)
312
Art. 49(1)(a)-(e)
313
Art. 49(2)
314
Art. 49(3)
315
Art. 49(3)
316
Art. 35(1) and Art. 57 regarding the notice preceding a standstill period.
317
Art. 57(2). A tenderer is “concerned” if it has not been “definitively excluded.” A definitive exclusion
is one that has been the subject of judicial decision, or is not longer subject to legal challenge. A candidate
is also “concerned” if it is has not been notified of its non-selection, Id.
318
Art. 57(2), ¶4-1
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national security, or prejudice the legitimate commercial interests of a private party.319
This notice must also contain an explanation of the operation and duration of the
standstill period rules of the Member State.320 The Directive permits Member States not
to apply a standstill period where contract notice was not required in the Official Journal
of the European Union; in the case of properly awarded sole source contracts; and in the
case contracts awarded under a framework agreement.321
3:43. “De-Briefing” (Article 35(2)). An unsuccessful candidate or tenderer may
request, in writing (but within no specific timeframe set out in the Directive), that the
Contracting Authority advise it of the reasons for its non-selection.322 The Contracting
Authority must respond within 15 days of the request with at least the reasons for nonselection; the name of the chosen contractor(which would often already been given in the
notice of Article 35(1)); and the “the characteristics and relative advantages of the tender
selected.”323 Of note, one of the reasons cited for possible non-selection is the tenderer’s
failure to satisfy the security requirements for information and supply. 324 As in the case
of the notice of the selection, some information may be withheld in the debriefing at the
discretion of the Contracting Authority, if its release might impede law enforcement,
jeopardize defence or national security, be contrary to public interest, or prejudice the
legitimate interests of other contractors.325
3:44. Public Notice of Actual Contract Awards (Article 30(3)). Contracting
Authorities must effect the required notice for awarded (often referred to as “concluded”)
contracts or framework agreements within 48 days of award.326 The content of the
contract award notice is set out in the Directive at Annex IV, Contract Notice. The
Notice includes the Contracting Authority; the procedure employed (e.g., Negotiated
Procedure with Publication of a Contract Notice – and, if without Publication of Notice,
the justification required by Article 28); the nature of the contract (e.g., service contract)
using descriptions in the EU Common Procurement Vocabulary; date of contract award;
award criteria; number of tenders received; tenderers selected (name and address);
prices/price ranges awarded; subcontracts (if any); justification for Framework
Agreements longer than 7 years (if any); and dates of contract opportunity notice and of
award notice.327 If the contract was awarded under a framework agreement, notice is not
required.328
319
Id.
Art. 57(2), ¶4-2
321
Art. 58
322
Art. 35(2)
323
Art. 35(2)(a)-(c)
324
Art. 35(2)(b)
325
Art. 35(3)
326
Art. 30(3). The Directive specifically permits formal publication of contract and framework agreement
awards even if not required, Art. 32
327
Annex IV, Contract Award Notice, ¶1 through ¶13
328
Art. 30(3), ¶2. This is because those contractors selected for the framework agreement were already
announced in the award notice of the framework agreement.
320
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● Derogation from Contract Award Notice (Article 30(3) ¶3). Notice need not be
provided about contracts or framework agreements if the notice would jeopardize law
enforcement, defence or security interests, public interest, the “legitimate commercial
interests” of contractors, or “might prejudice fair competition between them.”329
Subcontracting
3:45. Subcontractors and Subcontracting (Article 21). Compared to other topics in
the Directive, subcontracting receives considerable attention, and it is the only topic
mentioned specifically in the Directive as a required subject in the Commission’s 2012
Report on the “transposition” (implementation) of the Directive into the Member States’
national laws.330 The Directive’s rules on subcontracting are, unless stated otherwise,
mandatory on the Member States in regards to ensuring compliance with subcontracting
rules by their prime contractors.331
● Subcontract. A “subcontract” is a “contract”332 between a “successful tenderer”
and one or more economic operators.333 The Directive specifies that economic operators
that have formed together to pursue and execute a contract are not subcontractors to each
other.334
3:46. Principles of Subcontracting
● Prime Contractor Remains Responsible. The award of a subcontract in no
manner reduces the prime contractor’s liability or responsibility for the performance of
the contract.335
● No Discrimination by Prime Contractors. Tenderers (prime contractors) are to
treat all potential subcontractors in an equal and non-discriminatory manner,336 As the
Coordinating Provisions provide:
Potential subcontractors should not be discriminated against on grounds of
nationality. In the context of defence or security, it can be appropriate for
Contracting Authorities/Entities to oblige the successful tenderer to
organize a transparent and non-discriminatory competition when awarding
subcontracts to third parties. This obligation may apply to all subcontracts
329
Art. 30(3), ¶3
Art. 73(1). It specifies that the report is to address, “in particular,” Articles 21 (Subcontracting) and
Articles 50 to 54, which encompass Title III, Rules Applicable to Subcontracting.
331
Art. 50(1)
332
Art. 1(2)
333
Art. 1(22)
334
Art. 50(2)
335
Art. 21(7)
336
Art. 51 and Art. 52(7)
330
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or only to specific
Authority/Entity.337
subcontracts
chosen
by
the
Contracting
● Prime Contractor Free to Select Subcontractors. Unless otherwise required by
the Contracting Authority (see below), tenderers are free to select their subcontractors,
and cannot be required to discriminate on the basis of nationality.338
● Notice of Subcontracting Terms. If the Contracting Authority imposes any
subcontracting terms, they have to be contained in the contract notice.339
● Prime Bound by Approved Subcontracting Plan. A subcontracting plan that has
been approved by the Contracting Authority becomes a contractual obligation of the
prime contractor.340
● Best Practices in Subcontracting. The European Defence Agency has
promulgated a Code of Best Practice in the Supply Chain ("CoBPSC"), which, the EDA
explains is an integral part of the EDA’s "Code of Conduct." The initiatives of the EDA
to improve EU defence contracting are discussed in Section 4 to this Paper, but it
basically is intended to build a strong and diverse base of suppliers. As the Coordinating
Provisions state:
In the context of defence and security markets, the Members States and
the Commission should encourage the development and dissemination of
best practices between Member States and the European industry with a
view to promoting the free movement and competitiveness in Union
subcontracting markets, as well as the effective management of suppliers
and SMEs (small and medium size enterprises), in order to achieve the
best value for the money. Member States should communicate to all
successful tenderers the benefits of transparent and competitive tendering
and supplier diversity for subcontracts, and develop and disseminate best
practice supply chain management in the defence and security markets.341
3:47. Required Information Regarding the Prime Contractor’s Subcontracting
Intent (Article 21(2)). The Contracting Authority may ask (or be required by national
law to ask) tenderers to indicate in their tender whether they intend to subcontract, and, if
so, the share of the work to be subcontracted, the nature of the work to be subcontracted,
and the identity of any proposed subcontractor.342 The contractor can also be required to
report changes to its subcontracting plans that occur during contract performance.343 The
337
CP. (40)
Art. 21(1)
339
Art. 21(6)
340
Art. 21(4), ¶6
341
CP. (40), ¶4. See also the European Defence Agency’s Code of Best Practices in the Supply Chain,
discussed in Section 4 of this paper.
342
Art. 21(2)
343
Art. 21(2)
338
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Contracting Authority can also require tenderers to impose (flow down) specified
requirements on their subcontractors.344
3:48. Contracting Authority Rejection of a Proposed Subcontractor (Article 21(5)).
If the Member State reserves the right to approve a subcontractor, a proposed
subcontractor cannot be rejected except on the same bases as are applied to tenderers, and
the Contracting Authority must provide the tenderer (prime contractor) with written
reasons for the rejection of its proposed subcontractor.
3:49. Required Subcontracting (Article 21(4)).
subcontracting. As the Coordinating Provisions state:
Member States may require
…it seems appropriate to compliment the tenderer’s right to subcontract
with the option offered to the Member State to allow or require its
Contracting Authorities/Entities to ask that subcontracts representing at
least a share of the contract be awarded to third parties…. When such a
share is required, the successful tender should award subcontracts on a
transparent and non-discriminatory competition, so that all interested
undertakings have the same opportunity to benefit from the advantages of
subcontracting. At the same time, the proper functioning of the successful
tenderer’s supply chain should not be jeopardized. Therefore, the
percentage that can be subcontracted to third parties at the request of the
Contracting Authority/Entity should appropriately reflect the object and
value of the contract.345
● Amount of Required Subcontracting. If subcontracting is required, this is to be
clearly set forth in the contract notice, together with the required range of subcontracting
in terms of minimum and maximum, with the maximum not to exceed 30% of the value
of the contract. Such a requirement, if imposed, is to be commensurate with the object,
value, and practice of the industry.346 If subcontracting is required, the Contracting
Authority may require tenderers to propose what parts of the work they will
subcontract,347 and any approved subcontracting is applied towards the satisfaction of the
mandated percentage of subcontracting.348 Tenderers may propose to exceed the required
percentage of subcontracting,349 and if so, the tenderer can be required to state the work it
intends to subcontract.350
● Proposed Subcontractors. The Directive recognizes that it may be impractical to
conduct a competition for subcontractors before a contractor actually has an award, and
344
345
346
347
348
349
350
Art. 21(3)
CP. (40), ¶2
Art. 21(4)
Art. 21(4), ¶3
Art. 21(4), ¶2
Art. 21(4), ¶3
Art. 21(4), ¶5
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therefore “proposed” subcontractors are acceptable for purposes of tendering, but that
does not eliminate the requirement for competition in the eventual subcontracting
process.351
● Relief from Subcontracting Requirements (Article 53, ¶2). A contractor may be
absolved from mandatory subcontracting if it demonstrates to the satisfaction of the
Contracting Authority that none of the vendors in the subcontract competition would be
capable of satisfactorily executing the proposed subcontracting effort.
3:50. Rules for Prime Contractors in Effecting Subcontracting (Articles 50-54). If
the Contracting Authority requires subcontracting under Article 21(3) or 21(4), the
Directive provides that the following rules be applied by prime contractors in their
subcontracting.352
● No Improper Discrimination. Contractors must treat potential subcontractors in
an equal and non-discriminatory manner.353
● Notice of Subcontracting Opportunities. If a prime contractor has a contract
above the threshold for the application of the Directive,354 as estimated in accordance
with the Directive rules for valuation,355 it is required to give notice of any subcontracting
opportunities,356 and to act consistently with the European Union’s principles for
transparency and competition.357
The minimum content of the notice of the
subcontracting opportunity is specified in the Directive at Annex V, and is the same that
Contracting Authorities are required to employ regarding their prime contracts.
Contractors may include additional information in their subcontracting notices, and the
Directive permits the Contracting Authority to exercise approval authority over such
additional content.358 The rules for the publication of subcontracting notices are the same
as that for Contracting Authorities.359 Subcontracts awarded using the negotiated
procedure with publication of a contract notice are not required to satisfy the notice
requirements of Article 52.360 However, a contractor may give such notice, and, if so,
such notice must comply with the standard content and publication rules.361 In the notice
of the subcontracting opportunity, in addition to any mandatory information, the prime
contractor must indicate (and of course apply) the criteria for its selection as the prime
351
CP. (40), ¶3
Art. 50(1)
353
Art. 51
354
€412,000 for supply and service contracts and €5,150,000 for works contracts, Art. 8(a) and (b)
355
Art. 52(8)
356
Art. 52(1)
357
Art. 52(7)
358
Art. 52(2). The Directive indicates that the European Commission will devise standard forms for this
purpose, Art. 52(2), 2nd
359
Art. 52(3), citing Articles 32(2) to 32(5). Subcontracts awarded using the negotiated procedure with
publication of a contract notice are not required to satisfy the notice requirements of Article 52, Art. 52(4).
360
Art. 52(4)
361
Art. 52(5)
352
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contractor as prescribed by the Contracting Authority. The prime may also add other
criteria as long as they are objective, non-discriminatory, related to the object of the
contract and the capabilities reasonably needed to perform the contract, and are consistent
with the criteria established by the Contracting Authority.362
● Framework Agreements for Subcontracting (Article 52(6)). In order to satisfy a
mandatory contracting requirement, the contractor has the option of using framework
agreements.363 However, framework agreements for subcontracting may not be used to
unduly limit competition,364 and may not exceed seven years in duration except when the
service life of the contract, technical issues, etc., warrant an extension or a further
period.365 Subcontracts awarded under a framework agreement are to be consistent with
the terms of the agreement, and are to be made only to parties who are bona fide vendors
under the framework agreement.366
Challenges to, and Reviews of, Contract Actions and Remedies for Infringements
3:51. Reviews and Remedies – In General
● Reviews of Contract Actions (Articles 55, 56, 59). A review is an examination of
the Contracting Authority’s decisions in response to a challenge by a contractor who feels
the Contracting Authority is acting improperly. The review results in a decision and, if
there has been an error, corrective action – the remedy. An effective review system for
challenging perceived violations of the principles, rules, and laws of procurement has
long been recognized as a fundamental component of a credible public procurement
system. As the Coordinating Provisions provide:
Compliance with transparency and competition obligations should be
ensured by an efficient review system, based on the system which [the EU
has established in its Remedies Directives]. In particular, the possibility
of challenging the award procedure before the contract is signed should be
provided for, as should the guarantees necessary for the efficiency of the
review, such as the standstill period. The possibility of challenging illegal
direct awards or contracts concluded in violation of this Directive should
also be provided for.367
● Remedies (Article 56). Remedies are actions that must, or can, be taken when
there has been a violation (infringement) of the rules by the Contracting Authority. The
remedy can be a corrective action to the conduct of the procurement (such as amending
an unduly restrictive specification), or a payment to a contractor who has been wrongly
362
363
364
365
366
367
Art. 53
Art. 52(6)
Art. 52, ¶4
Art. 52(6), ¶3
Art. 52(6)
CP. (72)
Comparative Assessment Project 2010
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207
deprived of a contract or a contract opportunity, or even the monetary punishment of the
offending Contracting Authority. While the European Union has promulgated Remedies
Directives for procurements under the Public and Utilities Directives of 2004/17/EC and
2004/18/EC,368 the Defence Directive provides its own remedies authority, and in fact
exceeds them in some regards, but it clearly rests on the foundation of the other EU
Remedies Directives.
3:52. Reviews
● General Requirements for Review (Article 55(1)-(3)). The Defence Directive
requires that Member States have procedures to ensure that the actions and decisions of
Contracting Authorities may be reviewed, as effectively and rapidly as possible, when
there are allegations that the Contracting Authority has infringed Community law on
procurement or the national rules transposing Community law into national law. 369 The
Directive is clear that national rules may not to discriminate between requests for reviews
based on the Directive and those based on Member State law.370
● Standing to Apply for Review (Article 55(4)). The Defence Directive provides
that entities “having, or have had, an interest in obtaining a particular contract who has
been or risks being harmed by an alleged infringement” should be permitted to apply for
review.371
● Time Limits for Applying for Review (Article 59). The August 2009 Defence
Directive does not establish a minimum time for requesting review, but, if there is one set
by the Member State, the Directive sets minimum times. The Directive provides that
where a Member State requires that a request for review must be made within a certain
time limit, that time limit must be at least 10 days (15 days if the basis for the request for
review is prompted by a communication from the Contracting Authority that was sent by
mail) following the date on which the Contracting Authority sent the communication, OR
at least 10 days after the vendors’/candidates’ receipt of such communication.372 If the
contract in question did not require notice of award, an application for review must be
filed within 10 days of the public notice of the award.373
368
They are Council Directive 89/665/EEC, 21 December 1989, On the Coordination of the Laws,
Regulations, and Administrative Provisions Relating to the Application of review Procedures to the Award
of Public Supply and Public Works Contracts, and Directive 92/13/EEC, 25 February 1992, Concerning the
Laws, Regulations, and Administrative Provisions Relating to the Application of Community Rules on the
Procurement Procedures of Entities Operating in the Water, Energy, Transport, and Telecommunication
Sectors. They were amended by Directive 2007/66/EC, 11 December 2007, Amending Council Directives
89/665/EEC and 92/13/EEC, With Regard to Improving the Effectiveness of Review Procedures
Concerning the Award of Public Contracts.
369
Art. 55(2)
370
Art. 55(3)
371
Art. 55(4)
372
Art. 59
373
Art. 59
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208
● Information in Review Files. The Directive requires Member States to ensure the
security of sensitive and proprietary information that is placed into the review process,
and that when matters concern security and defence, Member States may assign sole
jurisdiction for review duties and powers to a specialized body in accordance with rules
established by the Member State.374 As to the presence of classified information in
reviews, the Directive allows Member States to devise and employ their national
procedures, but requires that those procedures insure the complainant with “the right to a
fair trial.”375 As the Coordinating Provisions state, that while transparency is key,
…review procedures should take into account the protection of defence
and security interests as regards the procedures of review bodies, the
choice of interim measures or penalties for infringements of obligations
relating to transparency and competition.376
● The Effect of the European Court of Justice’s Decisions in Uniplex and
Ireland. Decisions of the European Court of Justice are controlling legal authority in
areas of the Court’s jurisdiction. Therefore, these two decisions will certainly impact the
national rules on the time limits for initiating review proceedings, and perhaps even cause
an amendment to the 2009 Defence Directive itself. In its decisions in Uniplex (UK)
Limited v. National Health Service Business Servo,377 and European Commission v.
Ireland,378 both released on 28 January 2010, the ECJ invalidated national rule time limits
on applying for reviews (the national rules were based on the EU Remedies Directives).
The facts are as follows:
► Uniplex. Uniplex was not selected for a framework agreement by the United
Kingdom’s National Health Service. It was notified of this on 22 November 2007
together with the Contracting Authority’s recitation of the weighting criteria, the range of
evaluated scores and Uniplex’s score, and the names of the successful tenderers. In an email the next day Uniplex requested a “de-briefing,” which it received in the Contracting
Authority’s correspondence dated 13 December 2007. The 13 December 2007 debriefing letter contained details about the evaluation of tenders to which Uniplex took
great exception. Uniplex lodged its complaint with the NHS in its letter of 28 January
2008. The NHS responded by letter of 13 February 2008, in which it denied the
allegations and also asserted as an initial matter that Uniplex’ complaint was untimely.
The NHS was saying then, that a request for review made six weeks after it received the
13 December letter was “untimely” under the UK rules, which were that a request for
review had to be “timely or in any event within six months.” Uniplex sought judicial
review, and on reference from the High Court for England and Wales, the ECJ held that
treating Uniplex’s complaint as untimely was error, since the purpose of the Remedies
Directive “can only be realized if the periods [for making a complaint] laid down for
374
Art. 56(10)
Art. 56(10)
376
CP. (73)
377
Case C-406/08
378
Case C-456/08
375
Comparative Assessment Project 2010
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209
brining proceedings start to run only from the date on which the claimant knew, or ought
to have known, of the alleged infringement provisions.”379 The Court observed that the
UK regulation requiring that proceedings be brought “promptly” and in any event within
three months, “gives rise to uncertainty.”380 The ECJ concluded that “a limitation period,
the duration of which is placed at the discretion of the competent court, is not predictable
in its effects. Consequently, a national provision providing for such a period does not
ensure effective transposition of the Remedies Directive.”381
► Ireland. In Ireland, the ECJ ruled that the comparable Irish national rules were
likewise infirm for the same reasons as in Uniplex, and that “it is not possible for the
parties concerned to predict what the limitation period will be if this is left to the
discretion of the competent court. It follows that a national provision providing for such
a period does not ensure effective transposition of the Remedies Directive.”382
The effect of these decisions is likely to be that Member States will have to establish a
definite timeframe within which requests for review proceedings must be initiated, as
well as a definite benchmark event from which that timeframe commences.
3:53. Suspension of Contract Award Pending Review
● Suspension Pending the Decision of the Contracting Authority. If the Member
State requires the contractor to initiate review procedures with the Contracting Authority,
any such request for review must suspend the award of the contract for at least 10 days
(or 15 days if notice is by mail) of the Contracting Authority’s decision in response to the
request for review.383
● Suspension Pending the Decision of a Review Body Independent of the
Contracting Authority. In cases where a contractor has made a timely initiation of
proceedings to a “review body of first instance,” i.e., that is independent of the
Contracting Authority, the suspension of contract award is likewise mandatory pending
the decision of that body, and for a period thereafter equal to the standstill period of 10
(or 15) days.384 Otherwise, the Directive has no suspension requirements concerning a
review.385
● A Note on Review Bodies. Before proceeding, it is best to clarify that the
Directive contemplates a three-level regime where the Contracting Authority can be the
Review Authority –subject to further appeal is so desired by the contractor; there is a
Review Body other than the Contracting Authority; and there is another Review Body for
379
380
381
382
383
384
385
Uniplex at ¶32
Uniplex at ¶41
Uniplex at ¶42
Ireland at ¶75
Art. 55(6) as referenced in Art. 56(4)
Art 56(3)
Art. 56(4)
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cases where the first Review Body is not judicial in nature. In every case, those
responsible for reviews are to be afforded adequate time to render a decision, and to that
end, Member States’ rules on the suspension of contract actions should accommodate
such timeframes.386
3:54. The Involvement of the Contracting Authority in the Review Process
● Notice to the Contracting Authority. The Defence Directive provides that the
party seeking review may be required to notify the Contracting Authority of his intent to
seek review, providing that such a rule will not adversely affect the standstill period or
any other time limits for review.387
● Decision by the Contracting Authority. The Member States may also structure
their review procedures to require that the review process be initiated by seeking the
decision of the Contracting Authority, in which case, the Member State must ensure that
such a challenge result in an immediate temporary prohibition on making the contract
award.388 If the matter is referred to the Contracting Authority for decision, the period of
suspension must remain in effect for at least 10 days (or 15 days if notice if by mail) of
the Contracting Authority’s decision on the review challenge.389
3:55. Remedies
● The Review Authorities’ Powers and Remedies (Article 56). The Defence
Directive requires that the review system established by the Member States provide that
those assigned the decision authority, must have the authority to impose an appropriate
interlocutory corrective measures such as, but not limited to, the suspension of the
contracting action and setting aside and correcting improper actions, including those
pertaining to unduly restrictive or improper specifications and requirements.390 In
addition to these powers, those exercising review authority must be able to award
damages to a person who has been harmed by the infringement.391 The Directive permits
that these forgoing powers may be divided among separate authorities392 (e.g., those who
impose remedies can be different than those who award damages). In fashioning
remedies and other powers on review, the Directive requires that they be the type that can
be “effectively enforced” under the Member State’s national rules.393
● Review Bodies Independent of the Contracting Authority and Judicial Review.
Where the Review Body (i.e., other than the Contracting Authority) is not “judicial in
386
387
388
389
390
391
392
393
Art. 57(1)
Art. 55(5)
Art. 55(6)
Art. 55(6)
Art. 56(a) and (b)
Art. 56
Art. 56(2)
Art. 56(8)
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character,” the Directive requires that its decisions, and the reasons therefore, must be in
writing, and that Member States provide for a procedure of judicial review of those
decisions by a body that is independent of both the Contracting Authority and the (first
instance) Review Body.394 This body is referred to in the Directive as the Independent
Body, and the Directive requires that if they are not already judicial under national law,
that their appointment and tenure be the same as the judiciary, and that at least its
president have the same legal qualifications as a member of the judiciary. The Directive
requires that the decisions of such an Independent Body be legally binding.395
● Derogation of Remedies (Article 56(5)). The Directive allows Member States to
forgo warranted injunctive, corrective, and penalizing actions if it is determined that
those otherwise appropriate actions should not be taken in the interests of security or
public interest if the “negative consequences could exceed their benefits.”396 However, a
decision not to impose interim measures shall not preclude the person’s other
remedies.397
3:56. Damages (Article 56(6) & (7)). Damages are monetary payments to the harmed
party. The Directive permits that where damages are claimed, the Member State may
require that contested decision must first be set aside by a body that has those legal
powers.398 In cases where the challenged contract has already been awarded, Member
States may limit the remedies awarded to a harmed person to only damages.399
3:57. Ineffectiveness (Articles 60 and 61). Ineffectiveness, a term that is used variously
in several Member States’ national legal systems, commonly means a contract has been
declared improper by a competent legal body, and as a result of this impropriety, the
contract either, in accordance with the applicable national law, never came into legal
existence, or is now being cancelled and is of no future legal effect.
● Mandatory Grounds of Ineffectiveness (Article 60(1)). The Directive requires
that Member States empower a review body, that is independent of the Contracting
Authority, to make a contract ineffective under certain circumstances. 400 The reasons for
mandatory ineffectiveness are as follows: where a Contracting Authority has failed to
effect the mandatory prior notice of a contracting opportunity; 401 where a Contracting
Authority has acted contrary to the requirement of Article 55(6) concerning the
suspension of action to award a contract when a proper party has lodged a request for
review with the Contracting Authority;402 has likewise acted improperly, and contrary to
394
395
396
397
398
399
400
401
402
Art. 56(9)
Art. 56(9)
Art. 56(5) and CP. (73)
Art. 56(5)
Art. 56(6)
Art. 56(7)
Art. 60(1)
Art. 60(1)(a)
Art. 60(1)(b) – for a violation of Article 55
Comparative Assessment Project 2010
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suspension requited by Article 56(3) during the review by an independent body of the
first instance;403 or where a Contracting Authority has violated the rules of the standstill
period contrary to Article 57(2),404 and as a result of those violations, the contractor has
been deprived of its ability to obtain a proper review of and decision on its complaint;405
and where a Contracting Authority has improperly applied the standstill rules regarding
the award of framework agreements as required by Article 58(c).406
● Applying for Ineffectiveness. The Directive sets minimum time limits for
applying for a review for ineffectiveness,407 which are within 30 days after contract
notice that contains the information that is the basis for the review,408 or the Contracting
Authority’s provision of information to candidates and tenderers that contains the basis
for the review,409 “and in any case,” within 6 months after the award of the contract.410
● The Contractual Result of Ineffectiveness (Article 60(2)). The contractual and
legal consequences of a contract being declared ineffective are determined by the
Member State’s national law, to include the retroactive or prospective effect of the
ineffectiveness. If a contract is declared prospectively ineffective (i.e., cancelled only
from that point forward), the Directive requires the imposition of alternative penalties
under Art. 61(2).
● Derogations from Ineffectiveness (Article 60(3)). The Directive allows Member
States to empower their review authorities to leave an otherwise ineffective contract in
place if they find that “overriding considerations relating to a general interest, first and
foremost in connection with defence and/or security interest, require that the effects of
the contract should be maintained,” or that ineffectiveness would “seriously endanger the
very existence of a wider defence or security programme which is essential for the
Member State’s security interests.”411 As the Coordinating Provisions provide:
…review procedures should take into account the protection of defence
and security interest as regards…the choice of …penalties for
infringements…In particular, Member States should be able to provide
that the review body independent of the Contracting Authority/Entity, may
not consider a contract ineffective, even though it has been awarded
illegally on the grounds referred to in this Directive, where it finds, after
having examined all relevant aspects, that the exceptional circumstances
of the case concerned require certain overriding reasons related to a
403
Art. 60(1)(b)
Art. 60(1)(b)
405
Art. 60(1)(b)
406
Art. 60(1)(c)
407
Art. 62(1)
408
Art. 62(1)(a)
409
Art. 62(1)(a), ¶2
410
Art. 62(1)(b). In light of the European Union Court of Justice decisions in Uniplex and Ireland, the
time limits of Article 62(1) might be impermissibly vague or speculative.
411
Art. 60(3) and Art. 60(3), ¶4
404
Comparative Assessment Project 2010
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general interest to be respected. In light of the nature and features of the
works, supplies, and services covered by this Directive, such overriding
reasons should be first and foremost related to the general interests of
defence and security of the Member States. This can be the case, for
example, when the ineffectiveness of a contract would seriously endanger
not only the fulfillment of the specific project aimed by at it, but the very
existence of a wider defence and/or security programme of which the
project is a part.412
However, the Directive cautions that the economic effects of declaring a contract
ineffective can only justify a derogation from ineffectiveness if those economic
consequences would be “disproportionate.”413 Furthermore, the consequential economic
impact of making a contract ineffective, such as the cost re-contracting, the cost impact of
the delay or change in contractors, etc., are not (i.e., by themselves) sufficient to avoid
ineffectiveness.414
In cases where the Member State properly leaves an otherwise ineffective contract in
place, the Directive requires the imposition of alternative penalties under Article 61(2).415
3:58. Alternative Penalties (Article 61). Alternative penalties are either the imposition
of fines on the Contracting Authority or a shortening of the period of the improperlyawarded contract’s performance.416 If a Member State determines to declare a contract
prospectively ineffective (under Article 60(2)), or in accordance with Article 60(3) not to
treat an otherwise ineffective contract as ineffective, it must impose an “alternate
penalty.”417 The Directive advises that in order for alternative penalties to be effective
they must be proportionate and “dissuasive.”418 The alternative penalty decision is made
by a review body that is independent of the Contracting Authority, and in determining to
impose an alternative penalty, the body is to consider factors such as the serious of the
infringement, the conduct of the Contracting Authority, and the extent to which the
(otherwise ineffective) contract will remain in force.419 Finally, the Directive specifies
that an award of damages to the contractor does not constitute the alternative penalties of
Article 61.420
3:59. The “Corrective Mechanism” of the European Commission (Article 63).
Significantly, the Directive provides that the European Commission may intervene,
before a contract has been awarded, in cases where it considers that there has been a
412
413
414
415
416
417
418
419
420
CP. (73)
Art. 60(3), ¶2
Art. 60(3), ¶3
Art. 60(3), ¶5
Art. 61(2)
Art. 60(3),¶5 and Art. 61(1)
Art. 61(2)
Art. 61(2), ¶2
Art. 61(2), ¶3
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“serious infringement” of the contracting rules.421 Presumably, the Commission would
learn about these situations from nay source – to include the aggrieved contractor. In
these cases the Commission notifies the Member State of its belief that a serious
infringement has occurred,422 and the Member State must reply within 21 days that either
the infringement has been corrected;423 of the reasons for no correction;424 or that the
contract is suspended pending review.425
Section 4
The European Defence Agency’s Initiatives in European Union Defence
Contracting
4:1. The European Defence Agency (EDA). The EDA is an agency of the European
Union. It was established by the European Council on 12 July 2004.426
4:2. Purpose and Functions of the EDA. The EDA’s purpose is
…to support the Council and Member States in their effort to improve
European defence capabilities in the field of crisis management and to
sustain European Security and Defence Policy as it stands now and
develops in the future.
The EDA cites its main functions, which are aimed at improving Europe’s defence
posture, as promoting coherence in place of fragmentation regarding defence capabilities
development, armaments cooperation, the European defence technological and industrial
base and defence equipment market, and research and technology. The EDA sets its
goals as effecting a more integrated approach to capability development; promoting EU
defence-relevant research and technology, especially through collaborative projects
(especially for cost-effectiveness); playing a role in the better structuring of a European
defence industry; and opening up European defence contracting to international
competition.
4:3. Membership in the EDA. EU Member States are not required to participate in the
EDA. Members who participate are referred to as Participating Member States (pMS).
421
Art. 63(1)
Art. 63(2)
423
Art. 63(3)(a)
424
Art. 63(3)(b)
425
Art. 63(3)(c). In this case, the Member State must advise the Commission of when the suspension has
been removed or other action has been effected, e.g., a new contract procedure initiated, Art. 63(5).
422
426
The European Defence Agency is a continuation of the work of the Western European Armaments
Organization (WEAO) and the Western European Armaments Group (WEAG). The EDA effectively
represents the transference of their functions from the WEU to the EU framework, and thus continues the
decommissioning of the WEU.
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25 of the 26 EU Members States (except Romania), plus Norway, are pMS to the EDA.
By their membership, the nations have made a political – not legal – agreement to
encourage competition in the European defence market, on a reciprocal basis with the
other subscribing members.
4:4. The EDA and the Defence Directive
● Complimentary. The day after the enactment of the Defence Directive, the EDA
‘welcomed’ the Defence Directive, which it categorizes as addressing “specific features
of the European defence security market,” and as being complimentary to its July 2006
Code of Conduct, and which together are “key instruments in the shaping of a more
effective European Defence Equipment Market and a stronger European Defence
Technological and Industrial Base.”427
● The Effect of the Defence Directive on EDA Initiatives. The various initiatives
of the EDA (discussed below) established voluntary procurement rules and practices for
the pMS. With the Defence Directive, however, many of those practices will be
mandatory on an EU-wide basis - or clearly authorized by the Directive for being made
mandatory by the EU Member States in their national procurement rules. In effect, the
key practices that the EDA encouraged have gained the force of law through the
Directive.
4:5. The Intergovernmental Regime to Inject Transparency and to Encourage
Competition in the European Defence Equipment Market. The Steering Board of the
EDA established an Intergovernmental Regime to fashion, effect, and implement
voluntary agreements and standards on defence conduct and practices in procurements
that are conducted under the exemptions of Article 296. Membership in the Regime,
effective 1 July 2006, is organizationally distinct from membership in the EDA; members
of the EDA are Participating Member States (pMS) while members in the Regime are
Subscribing Member States (sMS).428 The Regime’s goals are to assist its sMS to operate
in consonance with the Code of Defence Conduct (discussed below in 4:6), and the
implement guidance on and support other defence procurement topics, such as supplier
selection, security of supply, security of information, and the harmonization (i.e.,
standardization) of offset practices.
● Key Products and Initiatives of EDA/Regime
► Supplier Selection. A Code of Best Practices in the Supply Chain
► The Code of Conduct. The Code of Conduct on Defence Procurement
► Offsets. Code of Conduct on Offsets
427
Press release of the EDA, EDA Welcomes New Directive ob Defence and Security Procurement [sic],
Brussels 15 January 2009
428
The same nations that participate in the EDA subscribe to the Regime.
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► Security of Supply. The Framework Agreement for Security of Supply
Between Subscribing Member States in Circumstances of Operational Urgency
► Information Security. The Memorandum of the EDA Steering Board on
Security of Information Between Subscribing Member States
4:6. Code of Conduct on Defence Procurement (21 November 2005). The EDA
describes the Code as its “first major achievement.” Recognizing that a “significant
proportion” of EU defence procurement takes place outside the normal national
procurement rules (i.e., the ones based on 2004/17/EC and 2004/18/EC) because of the
invocation of exemption under Article 296, the EDA hopes to “open up” to suppliers
having a technological and/or industrial base in sMS’ territories, all defence procurement
opportunities of €1M or more when the conditions of Article 246 (346) are invoked –
except for procurement of research and technology, collaborative procurements,
procurements of nuclear weapons and propulsion systems, chemical, bacteriological and
radiological goods and services, and cryptographic equipment. Once a decision has been
made to proceed without competition, to include excluded procurements in a
collaborative effort, the sMS will advise the EDA with an explanation for the reasons
therefore and information on the contract opportunity. These opportunities are
announced on the EDA bulletin board.
● General Principles of the Code of Conduct on Defence Procurement
► Subscribing Member Autonomy. Membership in the Code does not abrogate
in any manner, a sMS’ control over and authority for its defence contracting decisions.
► Voluntary and Non-Binding. sMS are under no legal obligation to abide by
the Code. They are free to withdraw at nay point, and no sanctions will be sought for
non-compliance.
● Code of Conduct Principles in the Procurement Process
► Fairness. sMS will accord fair and equal treatment to suppliers based in each
others’ territories.
► Notice. Advance notice of defence contract opportunities (i.e., those for which
the sMS is invoking Article 296/346) will be made on an EDA portal, together with an
explanation of the requirements and the applicable procurement rules.
► Selection Criteria. The contractor selection criteria will be transparent and
objective, and can include, in addition to technical ability and past performance, security
qualifications.
► Specifications. Specifications will be, to the extent appropriate and practical,
performance-based.
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► Award Criteria. The award criteria will be most economically advantageous,
with account for acquisition and life cycle costs, quality, security of supply, and offsets.
► Debriefings. Unsuccessful vendors will be given a debriefing on the reasons
for their non-selection.
● Mutual Transparency and Accountability. The Code contemplates that when a
sMS invokes an exception under Article 296, that other sMSs may “debate” that decision
before the EDA Steering Board, and in that regard, the EDA will act in an oversight
capacity.
● Mutual Support. The sMS recognize that the success of their efforts will depend
on the cooperation of their governments and suppliers, and in acting so as to instill a level
of confidence in each other. To this end, the sMS commit to making their national rules
and practices on defence procurement clear and predictable.
● Mutual Benefit. The Code recognizes that its success encompasses the creation of
an EU-wide defence industrial base, to include small and medium sized companies, and
that requires that the principles of procurement (e.g., transparency and fairness, etc.) be
practiced at the subcontract level as well as the prime contract level.
4:7. The EDA’s Code of Best Practice in the Supply Chain (21 May 2005). The EDA
describes its Code of Best Practice in the Supply Chain (CoBPSC) as an integral part of
its Code of Conduct. Its goal is increased competition and fair opportunities for all
suppliers in the supply chain, to include small and medium-sized enterprises. The
CoBPSC hopes to promote transparency and fair competition at the prime and subcontractual levels. In that regard, the commitment of national administrations, prime
contractors and other buyers in adopting good practices is recognized as essential.429
● Objectives of the CoBPSC. The CoBPSC’s objectives are to encourage the
evaluation and selection of suppliers on a fair and equitable basis; to make improvements
in quality, efficiency, timeliness and consistency in supply chain relationships; and to
encourage cooperation by all stakeholders in setting the terms for the supply and to
employ best practices to achieve shared goals. To this end, the Code encourages pMSs to
practice common values of professionalism, impartiality and fairness, to take into account
the relationships among buyers and their suppliers, and to include small and medium
sized enterprises. The EDA plans monitor these arrangements, based in part on
information provided by prime contractors.
4:8. The European Defence Agency’s Code of Conduct on Offsets (1 July 2009). The
Code of Conduct on Offsets is viewed as an integral part of the EDA’s program to
broaden opportunities for defence companies and to enhance the global competitiveness
429
Advertisements of defense contract opportunities on the EDA homepage clearly state that prime
contractors are required to comply with the CoBPSC.
Comparative Assessment Project 2010
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of European industry. There are 26 participating nations to the Offset Code.430 The
EDA’s views its treatment of offsets as “something which until now has been
unthinkable,”431 and as “instigating a groundbreaking yet pragmatic approach”432 to
reduce what it views as the adverse effects of offsets. Those adverse effects are, in the
EDA’s view, that offsets make defence procurement more complicated; are inefficient,
unnecessarily duplicative, and, in defence terms, rarely deliver value for money; and that
offsets are costly to the purchaser, and therefore detract from the availability of resources
for other requirements. Even so, the EDA acknowledges that offsets are driven by wider
political considerations and are a reality for the immediate future. It recognizes that
offsets are a global practice, and serve many purposes, and are only one aspect and factor
that affects the European defence equipment market and technological and industrial
base.
● Key Features of the EDA Offset Code
► Information on National Offset Practices. The Code requires sMS to provide
information, for public release, on their offset policies and awards. The information,
which is to be provided through the EDA, explains the sMS’ national offset practices and
polices, and the EDA will review the information provided to insure its accuracy and
currency.
► Information on Specific Offset Agreements. The sMS are also to provide the
EDA with information on all offset agreements they enter into after 1 July 2009. The
data provided is to include the percentage and type (e.g., direct and indirect) of offset,
regardless of whether as a part of a defence contract or a related separate agreement.433
► Policies on the Strategic Employment of Offsets. The EDA counsels that
offsets should be employed so as to strike a balance between developing the European
defence technical and industrial base, and achieving a level the playing field in the
European defence equipment market. sMS are to employ offsets in manners that are
designed to support capabilities within the EU that are “competent, competitive, and
capability driven.” Offsets should support the European defence technical and industrial
base of the future by facilitating the development of globally competitive “Centres of
Excellence,” and avoid unnecessary duplication. Offsets should be selected and
implemented with a view towards fostering the depth and diversity of the European
defence-centered supplier base, in particular small and medium sized enterprises and nontraditional supply sources to the European defence technology and industrial base in a
manner consistent with the goals of the Code of Best Practices in the Supply Chain.
430
The 26 subscribing countries are: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta,
Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom and Norway.
431
Alexander Weis, Chief Executive, EDA, EDA handbook, Code of Conduct on Offsets, .p. 3 (2010).
432
Id at p. 2
433
Many nations effect offset agreements in connection with defense procurements that are separate and
apart from the actual defense contract. In fact, in some cases, a Ministry of Defense will have the defense
contract portion while another ministry, e.g., Treasury or Commerce, has the offset agreement.
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● Specific Rules on Offsets in Defence Procurement. The Code requires sMS to
conduct their offset practices with the following rules:
► clearly identify any offset requirement in the contract notice
► clearly describe the role that offsets will play in the selection of the contractor
► When offset offers are used as a selection criterion, they are to be accorded
“less significant weight (or used as a subsidiary criteria in case of offers with the same
weight), in order to ensure that a procurement process is based on the best available and
most economically advantageous solution for the particular requirement”
► Offsets, both as required and as accepted, will not exceed the value of the
contract.434
► sMS are to allow foreign suppliers to select the most cost effective means of
satisfying an offset requirement within the purchasing country, with a view towards fair
and open competition within supply chains where this is practical, efficient, economical
and technically sound.
► sMS are, wherever practicable, “encouraged” to make “mutual abatements to
reduce reciprocal offset commitments”
4:9. The EDA’s Framework Agreement on Security of Information (20 September
2006). The EDA/Regime recognizes that sMS should be confident that any classified
information released to vendors from outside their territory should be protected, but that
contractors from other sMS should not be unfairly discriminated against because of
security concerns. To this end, sMS agree that they will apply the EU Council Security
Regulations435 and/or the EDA Steering Board’s Common Minimum Standards on
Industrial Security,” in cases where bilateral security agreements are not possible or
appropriate. Likewise, sMS commit to maintaining the confidentiality of materials and
information submitted to them by companies and contractors, which information has been
designated by the submitter as confidential or proprietary.
4:10. The EDA’s Framework Agreement for Security of Supply Between
Subscribing Member States in Circumstances of Operational Urgency (20 September
2006). The EDA, recognizing that sMS should be confident that, when placing orders
with suppliers outside their territory, that such suppliers are, and will remain, dependable
and reliable sources of supply. To this end, the sMS agree that, in an emergency, crisis,
or armed conflict, they will immediately consult regarding their ability to supply each
other as expeditiously as possible. In this regard, they will encourage the support and
434
The EDA describes this provision as a “crucial enabler in the process to reduce reliance on offsets.”
Handbook at p. 3.
435
Decision 2004/264/EC in the Annex at §XIII of Part II
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cooperation of their national suppliers or meet a sMS requests, and/or satisfy the request
from their own stocks.
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