COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing the European Defence Fund

EN EN
EUROPEAN
COMMISSION
Brussels, 13.6.2018
SWD(2018) 345 final
COMMISSION STAFF WORKING DOCUMENT
IMPACT ASSESSMENT
Accompanying the document
Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL
establishing the European Defence Fund
{COM(2018) 476 final} - {SEC(2018) 314 final}
Europaudvalget 2018
KOM (2018) 0476
Offentligt
1
Table of contents
Contents
1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT............................................................... 2
1.1. Scope and context..............................................................................................2
1.1.1. Geopolitical and economic context and EU defence policy initiatives........ 2
1.1.2. European Commission proposal: addressing the industrial angle................ 3
1.1.3. Scope of the Impact Assessment.................................................................. 4
1.2. Lessons learned from previous programmes.....................................................4
1.2.1. Observations from first implementing experience of PADR and comparison
of modalities between PADR and EDIDP.................................................................. 4
1.2.2. Feedback from Stakeholders ........................................................................ 5
2. CHALLENGES AND OBJECTIVES .................................................................................................. 6
2.1. Problems drivers................................................................................................7
2.1.1. Increasing costs of defence equipment and high R&D costs in rapidly
evolving technology environment.............................................................................. 7
2.1.2. Cuts in defence spending.............................................................................. 8
2.1.3. Limited cooperation between Member States and few programmes linked
to EU priorities ......................................................................................................... 10
2.2. Problems that the Fund aims to tackle.............................................................13
2.2.1. Few projects along the entire cycle of capability development ................. 13
2.2.2. Fragmentation and lack of collaboration between undertakings................ 14
2.3. Baseline scenario.............................................................................................18
2.4. Complementarity with other MFF programmes and Union's initiatives.........19
2.5. Objectives and eligible actions........................................................................21
2.5.1. General objective........................................................................................ 21
2.5.2. Specific objectives...................................................................................... 21
2.5.3. Actions to be financed to achieve the general and specific objectives....... 22
3. PRIORITIES, RIGHT TO ACT, BUDGETARY AMOUNT............................................................. 23
3.1. Prioritising actions...........................................................................................23
3.2. The right to act.................................................................................................24
3.2.1. The intended legal base .............................................................................. 24
3.2.2. The subsidiarity (EU added value) and proportionality ............................. 24
3.3. Appropriateness of the budgetary amount.......................................................25
3.4. Introduction of Options ...................................................................................26
4. DELIVERY MECHANISMS OF THE INTENDED FUNDING ...................................................... 27
4.1. Structure, delivery mechanisms and related IPRs varying across the
Options ............................................................................................................27
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4.1.1. Programme Structure and Governance (management)............................... 28
4.1.2. General delivery mechanisms..................................................................... 29
4.1.3. Intellectual Property Rights........................................................................ 31
4.1.4. Defence-specific characteristics................................................................. 32
4.2. How do the Options compare? ........................................................................36
4.2.1. Overall expected impacts of the chosen Option......................................... 38
4.3. Conclusions .....................................................................................................39
5. HOW WILL PERFORMANCE BE MONITORED AND EVALUATED?....................................... 40
5.1. Monitoring: implementation based indicators.................................................40
5.1.1. Success indicators in the short term ........................................................... 40
5.1.2. Success indicators in the medium and long term ....................................... 41
5.2. Additional indicators collected from applicants..............................................42
5.3. Additional indicators collected from the EDTIB ............................................43
5.4. Monitoring and Evaluation reports..................................................................43
ANNEX 1: PROCEDURAL INFORMATION............................................................................................ 45
Lead DG(s), DEcide Planning/CWP references........................................................45
Organisation and timing ............................................................................................45
Consultation of the Regulatory Scrutiny Board ........................................................45
Evidence, sources and quality ...................................................................................46
Bibliography............................................................................................................. 46
ANNEX 2: STAKEHOLDER CONSULTATION....................................................................................... 52
Identification of stakeholders ....................................................................................52
Consultation methods................................................................................................52
Analysis of feedback from the Open Public Consultation ........................................52
Analyses of feedback from position papers and consultations..................................54
Stakeholders not supporting the objectives of the Fund:.......................................... 54
Stakeholders supporting the objectives of the Fund................................................. 54
ANNEX 3: EXAMPLE ILLUSTRATING FRAGMENTATION IN THE EU DEFENCE
INDUSTRY ........................................................................................................................................ 57
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Glossary
Term or acronym Meaning or definition
CARD Coordination Annual Review on Defence
CDP Capability Development Plan
CSDP Common Security and Defence Policy
EDA European Defence Agency
EDIDP European Defence Industrial Development Programme
EDTIB European Defence Technological and Industrial base
EIB European Investment Bank
EU European Union
IPR Intellectual Property Rights
MFF Multiannual Financial Framework
OCCAR Organisation for Joint Armament Cooperation
PADR Preparatory Action on Defence Research
PCP Pre-Commercial Procurement
PESCO Permanent Structured Cooperation
R&D Research and Development
R&T Research and Technology
SMEs Small and Medium-sized Enterprises
TFEU Treaty on the Functioning of the European Union
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1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT
1.1. Scope and context
1.1.1. Geopolitical and economic context and EU defence policy initiatives
The EU’s geopolitical context has changed dramatically in the last decade. The situation
in Europe's neighbouring regions is unstable and the EU faces a complex and challenging
environment combining the emergences of new threats like hybrid and cyber-attacks and
the return of more conventional challenges. Faced with this context both European
citizens and their political leaders share the view that more has to be done collectively to
defend ourselves. 75% of Europeans support a common defence and security policy (1
).
In the joint declaration of 25 March 2017 in Rome, leaders of 27 Member States and the
European Council, the European Parliament and the European Commission stated that
the Union will strengthen its common security and defence and foster a more competitive
and integrated defence industry.
In light of the above, Member States agreed to step up the work of the European Union
(EU) in this area with a number of initiatives. Processes have been put in place to identify
and prioritise common capability needs; notably through the Capability Development
Plan ('CDP') (2
). To help identify opportunities for new collaborative initiatives, the
Coordinated Annual Review on Defence ('CARD') (3
) can play an important role through
monitoring of national defence plans. Furthermore, in the context of the EU's Common
Security and Defence Policy ('CSDP') a Permanent Structured Cooperation ('PESCO')
has been set up (4
)(5
) to deepen defence cooperation among Members States who are
capable and willing to do so. Currently 25 Member States participate, which have made
binding commitments relating for example to investment levels on defence equipment or
cooperation to improve the interoperability of forces. Its implementation will be rolled
out progressively (6
). Within PESCO participating Member States can carry out
cooperative projects (7
) in the key areas of the commitments relating to capability
development and CSDP operations and missions.
Key to the Union to strengthen its common security and defence and to implement the
Union's CSDP is to have a defence research and industrial base that is able to deliver the
innovative and future defence equipment and technologies Europe needs.
1
Special Eurobarometer 461 (2017).
2
The CDP is produced by the European Defence Agency to address long-term security and defence challenges. It looks
at future security scenarios and makes recommendations about the capabilities European militaries will need to react to
a variety of potential developments. The CDP is a comprehensive tool providing a picture of European military
capabilities over time.
3
This monitoring is currently in a trial phase ahead of a full implementation planned for autumn 2019.
4
OJ L 328, 12.12.2017, p. 19.
5
Article 42(6) and 46 and Protocol 10 of the Treaty on European Union.
6
Council Recommendation of 6 March 2018 (6588/1/18) concerning a roadmap for the implementation of PESCO.
7
Council Decision (CFSP) 2018/340 of 6 March 2018 establishing the list of projects to be developed under PESCO.
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1.1.2. European Commission proposal: addressing the industrial angle
To address the industrial angle, the Commission decided to contribute by making use of
its competences and the tools available to it under the Treaty on the Functioning of the
European Union (TFEU).
In his 2016 State of the Union, President Juncker announced a European Defence Action
Plan and the creation of a European Defence Fund.
On 7 June 2017, the Commission adopted a Communication launching the European
Defence Fund ('the June Communication') (8
) that consists of two windows: a research
window and a capability window. Under the research window the Fund can finance
collaborative research in innovative defence products and technologies. Under the
capability window the Fund can finance collaboration in the subsequence development
phases. To address some of the most common challenges that Member States face when
jointly acquiring defence capabilities, tools will be proposed that Member States can
voluntarily apply ('the Financial Toolbox'). These tools do not entail EU budgetary
spending, but are a mechanism for financial coordination.
A two-step approach was proposed: firstly, to test the approach, initial financing for both
research and development would be made available under the 2014-2020 Multi-Annual
Financial Framework ('MFF'); secondly, a dedicated Fund would be established under the
MFF 2021-2027 scaling up the funding for collaborative research in innovative defence
products and technologies and for subsequent stages of the development cycle, including
the development of prototypes.
In the first step, the Commission launched under the research window a Preparatory
Action on Defence Research ('PADR'), with a total expected budget of EUR 90 million
(9
) over three years, in April 2017. Operational since 2017, it is in its early stages with
first grant agreements signed end-2017 and beginning of 2018. Under the capability
window the Commission proposed a Regulation for a European Defence Industrial
Development Programme (EDIDP) 2019-2020 with a budget of EUR 500 million. The
Council and the European Parliament reached a provisional agreement on the EDIDP on
22 May 2018. The EDIDP is planned to become operational in 2019.
The current legislative initiative for the European Defence Fund post-2020 ('the Fund')
relates to the second step of financial support under the 2021-2027 MFF.
It is part of the Commission's proposal for the new 2021-2027 MFF (10
). Under this
proposal, the Fund will have a budget of EUR 13 billion (current prices).
8
European Commission, Communication on launching the European Defence Fund, COM (2017) 295 final.
9
The budget of 2017 and 2018 has been committed; the budget for 2019 has been requested to the budgetary
authorities.
10
European Commission, Communication on the Multiannual Financial Framework for 2021-2027, COM (2018) 321
final.
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1.1.3. Scope of the Impact Assessment
This Impact Assessment supports the proposal for a Regulation of the European
Parliament and of the Council establishing the European Defence Fund for the period
2021-2027.
The legislative proposal is distinct from the specific programme implementing the
Framework Programme for Research and Innovation ('Horizon Europe') that focusses on
civil applications. A separate impact assessment was carried out to accompany that
specific programme.
The legislative initiative does not relate to the Financial Toolbox, which complements
this initiative. For example, under the Financial Toolbox standardised models are
developed to help organise the financial planning and implementation of the acquisition
phase of collaborative projects, which can address problems stemming from the lack of
synchronisation of budgetary procedures (11
). Member States may draw upon these
models to facilitate or structure the design of projects financed by the Fund.
The Impact Assessment satisfies the requirements of the Financial Regulation in respect
of preparing an ex-ante evaluation.
1.2. Lessons learned from previous programmes
1.2.1. Observations from first implementing experience of PADR and comparison of
modalities between PADR and EDIDP
The programmes established under the current MFF have been in place for a limited time
and therefore do not offer important opportunities to learn and take the experience into
account in the preparation of this programme.
The preparatory action on defence research was launched in April 2017 with a total
budget of EUR 90 million over three years. It has started to bring first concrete results,
with the first grant agreements signed at the end of 2017 and beginning of 2018, but all
projects are still ongoing.
The applicants to the 2017 calls cover a wide geographical area: entities of 25 EU
Member States and Norway applied, including a large number of unique applicants: 187
in total. The projects selected for funding include participants from 17 EU Member
States. In terms of type of applicants, the proposals include private sector, both large and
small industry, SMEs, public bodies and research centres and universities. SME
participation is at 30% in the proposals without the PADR imposing strict rules on SMEs
participation. This SME participation rate has been retained in the projects selected for
funding with 32% participation of SMEs with a budget value of 14%. This data shows
that the calls of the first year of the PADR had a good response and attracted strong
interest from the sector. From this good response rate, the preliminary conclusion can be
11
The Cooperative Financial Mechanism (CFM) developed by the EDA is an example of such a mechanism.
5
drawn that relevant defence topics have been addressed and generated substantial interest
from the sector.
The proposed EDIDP Regulation for 2019-2020 will have a budget of EUR 500 million.
The co-legislators reached a compromise agreement on 22 May 2018. The EDIDP should
be operational from 1 January 2019.
The compromise agreement found has shown the political will of the co-legislators to
rapidly agree on the budget, set-up and implementing modalities of a programme for co-
financing of the development of defence products and technologies.
Furthermore, some observations can be made as to which extent the PADR and EDIDP
(based on the text of the provisional agreement) are aligned and whether there is scope
for further simplification and streamlining:
Whilst both windows provide financial assistance, through grants and procurement of
studies, a number of differences exist relating to their operating modalities - mainly
linked to the eligibility of entities (e.g. those relating to the location of the establishment,
control of the company), funding rates, Intellectual Property Rights ('IPR'), and specific
incentives relating for example to the participation of Small and Medium Sized
Enterprises ('SMEs').
Whilst some differences could be well justifiable, others are merely the result of the fact
that the programmes have been set-up separately and of the outcome of the different
adoption processes. In particular, differences in the eligibility conditions seem less
justifiable, as both windows have the same general objective.
1.2.2. Feedback from Stakeholders
To give all stakeholders the possibility to comment, the Commission initiated an Open
Public Consultation on the Fund, as part of a larger consultation exercise on all policy
areas covered by the EU's long-term budget for 2021-2027. The Open Public
Consultation ran from 13 January 2018 to 9 March 2018. Through the dedicated web
portal several position papers have been received.
Several Stakeholders also contributed with separate written input.
Annex 2 provides a synopsis report of the Stakeholder consultation.
Stakeholders have been reached that are directly affected by the Fund, such as Member
States, Industry and Research Institutions. In addition, Stakeholders have been reached,
like citizens and Non-governmental Organisations, that have an opinion on the subject,
but are not direct beneficiaries. The latter group includes Stakeholders that are very
critical to the initiative putting forward arguments of an ethical nature and arguing that
resources should be better spent on civil sector and peacekeeping initiatives.
The directly affected Stakeholders supported the initiative: they commented on the topics
to be financed and made suggestions on the structure of the Fund and funding modalities:
6
 Research Institutions and Industry argued that long/mid-terms research priorities
should be prioritised (technology push and disruptive research) with a view to long-
term competitiveness of the sector and providing capabilities.
 Industry argued that the Fund should be set up as a holistic capability-driven
approach covering the whole technology cycle, outside the Framework Programme
for Research and Innovation, on the basis of a single regulation. The Fund should
align as much as possible the modalities of the two windows.
 On IPR rules, Stakeholders were united in their views that specific IPR models are
needed for defence. Research Institutions argued for preserving the rights of all
participants in the projects and not only large industry.
 On funding rates, views were shared that funding rates need to take into account the
specifics of the sector. Research Institutions argued for higher financial contributions
for research up to 100% to better cover indirect cost notably related to infrastructures.
The report from a Group of Personalities on the Preparatory Action for defence-
related research (Group of Personalities Report) (12
) advised that the rules of
participation of Horizon 2020 needed to be adjusted to address defence specificities
and that the applied 25% flat rate to cover indirect costs is too low. An industrial
association confirmed that the current funding rates of PADR and EDIDP only cover
around 50% of the real industrial costs, which contrary to the civil sector, is not
appropriate for defence as there is one customer who determines the requirements,
timetables and export markets. Defence companies cannot risk investing in research
activities for a product that may never be acquired by the customer or exported.
 Several inputs called for a simple, but flexible approach: Research Institutions plead
for one simple cost method. An industry association argued in favour of lean
processes, single-point leadership, a single set of specifications and strong
commitment from Member States as regards acquisition. The Group of Personalities
Report found that options for co-funding by Member States should be considered e.g.
through models like Pre-Commercial Procurement ('PCP'). Also the use of financial
instruments in cases where there are civil spin-offs or in case of testing facilities has
been suggested.
2. CHALLENGES AND OBJECTIVES
The below section presents the current situation and problems that the Fund aims to
tackle, focusing first on the problem drivers, then identifying the problems and their
consequences and concluding with the elaboration of the Baseline scenario. The building
blocks of this analysis are presented in the Problem Tree (Figure 1) (13
).
12
European Union Institute for Security Studies and European Commission (2016)
13
The numbers or letters in square brackets in the text of the next section refer to the blocks of problems as presented
on the Problem Tree.
7
Figure 1: Problem tree
2.1. Problems drivers
2.1.1. Increasing costs of defence equipment and high R&D costs in rapidly evolving
technology environment
The defence sector is characterised by increasing costs of defence equipment and by
high R&D costs [1] that limit the launch of new defence programmes and directly
impact on the competitiveness and innovation capacity of the EU industry.
The costs of successive generations of defence goods increase at a rate that exceeds by
far the average inflation rates for civil products. Estimations of intergenerational cost
escalation easily reach figures as high as 5% or even 10% per year in real terms (14
). It is
a long-term trend in the defence sector and finds its roots in technological competition in
a field where relative performance is paramount and the competition and innovation
frequently takes place at the technology frontier which is immensely expensive (15
).
This trend exerts a key structuring effect on the defence sector: “… the resulting rate of
cost escalation, being much faster than any peacetime budget growth (or decline), has
been the primary determinant (via changing ratios of budget to unit costs) of the numbers
and types of equipment procured and, thence, of both military and industrial roles and
structures” (16
). Costs rising at a pace that cannot be matched by an equivalent increase
in defence equipment budgets has led to a falling number of units that national budgets
can afford, a reduction in the length of the series produced, a limited capacity to tap on
economies of scale and a lower frequency of new development projects.
14
Kirkpatrick (1995) and (2004); Pugh (1986), (1993) and (2009); Hove & Lillekvelland (2016); and Nordlund (2016).
15
Hove & Lillekvelland (2016).
16
Pugh (1993), p. 179.
8
The magnitude of R&D expenses in relation to the recurring costs is also a key factor in
the defence sector. The share of development costs in acquisition costs may significantly
depend on the type of equipment developed, 25% being considered as a good average
indicator (17
). The ratio of R&D costs to recurring costs of defence programmes is
considered several times higher than the corresponding ratio for civil programmes (18
).
To provide an order of magnitude, the development costs of the Eurofighter Typhoon to
the four partner nations are estimated at more than EUR 20 billion (prices of 2012) (19
).
This figure is 33 times higher than the combined yearly defence R&D budgets of 24
European Defence Agency ('EDA') participating Member States other than France,
Germany and the UK and more than 333 times higher than the defence R&D expenses of
a medium-sized Member State such as the Netherlands. With cost increasing steeply
between successive generations of defence systems, many of the future development
programmes will be beyond the financial capacity of individual Member States.
Limited and dispersed investments will fail to produce the necessary effects as critical
mass thresholds would not be reached. Literature provides evidence of such critical mass
effects showing that below a certain threshold “it is not optimal to invest any money” (20
).
In view of the cost escalation, of the magnitude of non-recurring R&D expenses and of
the small series that can be procured nationally, the development of a new generation of
major defence systems and of new defence technologies is increasingly beyond the reach
of single EU Member States. The resulting difficulties are further increased by the recent
trends in defence spending described below.
2.1.2. Cuts in defence spending
The situation of the defence sector has been further exacerbated by important cuts in
defence budgets across Europe [2] in the past 10 years, affecting in particular R&D and
equipment expenditures. Between 2006 and 2013 real defence expenditure levels in the
EDA participating Member States were reduced by 12% (21
). Defence R&D expenditures
suffered more and their share in total defence expenditures is expected to be 4.2% in
2016 compared to 4.9% in 2006.
The most drastic cuts have affected defence the early stages of the R&D cycle i.e. the
Research &Technology ('R&T') expenditure: accounting for EUR 2.7 billion in 2006 it is
estimated at EUR 2.1 billion in 2016 (a reduction by more than 22%). Defence R&T’s
share in total defence spending has fallen from 1.32% to estimated levels of only 1.06%
in 2015 and 1% in 2016, which is half of the benchmark level agreed on by the EDA’s
Ministerial Steering Board in November 2007.
17
Mauro (2017). See also Pugh (2009) and Maulny et al. (2018).
18
European Parliament (2016), p. 33.
19
Europe Economics (2013). Official information on the development costs, approximately GBP 6.7 billion, of the
Eurofighter Typhoon to the UK budget is provided by the UK National Audit Office (2001).
20
Setter and Tishler, (2006), p.150.
21
European Defence Agency (2018).
9
Figure 2: Defence R&T expenditures as percentage of total defence spending
Source: European Defence Agency, 2018, p. 40.
Considering that defence R&T is the basis for the development of the future cutting edge
defence technologies, such trends are particularly worrying and pose a serious challenge
to the capacity to maintain EU’s defence industry competitiveness over the long term.
Defence equipment and R&D expenditures in the EU are also substantially lower than
those of the United States. Figure 3 below shows that in 2011 defence equipment
procurement expenses in the EU were three times lower and defence R&D expenditures
were seven times lower than those of the United States.
Figure 3: Defence investment breakdown in absolute values [EUR billion]
Source: European Defence Agency, 2013, p.10.
Finally, in the defence sector it cannot be expected that a lack of publicly funded projects
could be offset by an increase in privately funded investments (22
). The demand
22
See for instance EUISS and European Commission (2016), p.43. Moura (2011) provides figures for France showing
that State funding is significantly more important for firms who receive defence State R&D funding (37% against 8%
for all enterprises performing R&D) while the level of self-funding is much lower (20% against 73%).
10
addressed to the industry comes almost exclusively from States and in particular from
their defence national budgets. The sector is also subject to a strict regulation by the host
States, the production and exports of armament being subject to specific authorisation
systems. Sensitive technology transfers are also controlled and specific dispositions
aimed at ensuring security of information and security of supply are also put in place.
Unlike most civil sectors, there is therefore no market demand composed by a large
number of independent customers that industry can freely serve on its own initiative. In
view of the fact that demand, and therefore investment, is entirely driven by Member
States, the industry would normally not embark on substantial spontaneous self-funded
defence Research and Technology or development projects. It will rather work on
demand for a State which, being in a situation of monopsony, will be funding the full
R&D costs through a contract for the procurement of these services. The Group of
Personalities Report notes: “The defence market is unique and does not follow the
conventional rules and business models that govern more traditional markets, such as
those for consumer goods. A clear example is that the prevailing worldwide model of
product development for large defence systems involves national governments funding
almost 100% of the R&T costs” (23
.) An assessment of the origin of the R&D budgets of
French companies (24
) also puts in evidence the importance of public funding and the
very low levels of self-funding for the enterprises that received defence R&D funding.
2.1.3. Limited cooperation between Member States and few programmes linked to EU
priorities
Despite the interplay between increasing costs and decreasing spending, defence
planning and defence spending on R&D and procurement of equipment has remained
largely at national level with very limited cooperation between Member States in
defence equipment investments [3]. Additionally, when implemented, only few
programs are also linked to EU capability priorities [3].
Weak levels of collaboration are extremely worrying in a longer-term perspective: "static
defence budgets and low equipment spending means that a competitive defence industry
is not sustainable on a national basis anymore" (25
).
In 2015 only 16% of equipment was procured through European collaborative
procurement, far away from the agreed collective benchmark of 35% (Figure 4). This is
the second worst performance observed; while the best level attained (2011) was still
more than 10 percentage points short of the benchmark level.
23
EUISS and European Commission (2016), p.43
24
Moura (2011).
25
European Union Institute for Security Studies (2007).
11
Figure 4: European collaborative defence equipment procurement as a percentage of defence equipment
procurement [%]
Source: European Defence Agency, 2018, p. 40.
The share of European collaboration in defence R&T (estimated level for 2015 of only
7.2%) is also very far from the agreed collective benchmark of 20%. Since 2012 more
than 90% of defence R&T has been run on a national basis.
Figure 5: European collaborative defence R&T as a percentage of defence R&T spending [%]
Source: European Defence Agency, 2018, p. 40.
Several reasons can explain the reluctance of Member States to step up cooperation.
First, Member States may desire to preserve full sovereignty as regards some types of
capabilities and therefore attempt to keep a completely independent national industrial
capacity to sustain the latter. Considering however cost escalation and budgetary trends,
cooperation has no viable alternative but for a very restricted set of areas.
12
Second, experience with past collaborative projects points to issues that can increase the
costs and reduce the net benefits of collaborative projects in comparison with an
equivalent one-nation project (26
). It should however be noted that, even by taking into
account that collaborative projects can imply additional costs compared to equivalent
theoretical national projects, the development costs are shared amongst the participants.
The financial burden that falls on the individual participating Member States in a
collaborative programme is thus lower than if they had to undertake the development in
isolation (27
). This enables in particular the realisation of large projects that would not be
affordable for a single Member State, as well as achieving higher scales of production
leading to lower unit costs.
As regards the difficulties experienced in past defence collaboration programmes, the
following elements can be noted. The governance of collaborative programmes is more
complex and requires an additional layer of discussions and negotiations to take place
and higher levels of transactions costs to be supported. Issues linked to a lack of common
defence planning and of synchronisation of capability procurement policies and calendars
between Member States have often limited or prevented the possibility for collaboration
(28
). Problems with the synchronisation of budgetary procedures also have a negative
impact on collaborative projects (29
). The allocation of work shares in collaborative
projects is also generally defined on the basis of the financial contributions by each
participating country rather than on the basis of economic efficiency and competitiveness
(“juste retour” principle). Duplications are thus not entirely avoided and work is often
not allocated in most efficient way.
Last, but not least, the difficulty in defining common technical specifications has been a
major issue (30
). Failure to harmonise requirements increases the system’s complexity,
inflates costs and causes delays. It reduces the benefits of collaboration as low
commonality has also negative effects on economies of scale. It even can make
collaboration impossible (31
). Standardization and interoperability are thus reduced.
Difficulty in agreeing on common technical specifications can be the result of national
differences stemming from diverging doctrines, assessments of needs and operational
26
Comparing real collaborative and national projects does not provide clear evidence of an efficiency disadvantage of
the former, the latter being also frequently affected by important cost overruns and delays. Hartley (2008) shows that
the Eurofighter Typhoon’s cost and time escalation is not abnormal in comparison with other contemporary national
defence projects. Hartley also notes that industrial duplications in the project were limited to the final assembly line
which represented only 5% of production costs. Hartley (2018) looks at a limited sample of projects and notes that it
shows “national projects with higher cost increases compared with collaborative projects and similar delays”.
Heuninckx (2008) also confirms that once collaborative defence procurement has been launched the cost overruns and
delays of collaborative projects and similar national projects appear comparable.
27
See for instance Hartley (1993). A recent report from the French Court of Auditors also underlines the importance of
sharing development cost though collaborative programmes (Cour des Comptes 2018).
28
In the 1980s France and Germany considered the joint development of a new tank, but German plans required the
tank to be made available quickly while France was planning for a decade later (European Union Institute for Security
Studies 2007).
29
In some cases countries has to pay temporarily on behalf of other participating States facing issues with budgetary
approval procedures (European Union Institute for Security Studies 2007).
30
In the Tiger helicopter project two substantially different versions were developed to respond to respectively French
and German specifications (European Union Institute for Security Studies 2007). The NH-90 helicopter has 22 versions
and 60 standards thus significantly reducing the financial benefits of collaboration (Cour des Comptes 2018).
31
The reasons for decision of the UK to withdraw from the Horizon frigate project included the impossibility to agree
to common specifications with the other participating Member States (European Union Institute for Security Studies
2007).
13
requirements, but also national industrial interest can be a motive. When capability
priorities are commonly agreed at the EU level, notably through the CDP and
implemented under PESCO, a higher degree of convergence regarding the above-
mentioned elements can be expected. This should make the definition of common
technical specifications easier. However, such joint definition of capability priorities has
not yet been sufficiently prioritised by Member States, while critical shortages of key
enablers, such as air-to-air refuelling and strategic lift have become apparent (32
) and the
need “to invest adequately” in a large area of key capabilities has been recognised by the
Council of the European Union (33
).
2.2. Problems that the Fund aims to tackle
The roots causes described above challenge the capacity of the EU defence industry to
sustain the industrial and technological capabilities necessary to preserve its
competitiveness and leadership.
2.2.1. Few projects along the entire cycle of capability development
A first major consequence of increasing costs, defence spending cuts and limited
cooperation between Member States is the general lack of opportunities in terms of
new major defence technological and industrial projects [A], including a lack of
European collaborative programmes (34
). Such a situation puts the EU industry at a
serious disadvantage in a sector characterised by strong competition on technology and a
high importance of R&D activities.
The cuts in defence R&T have substantially reduced the overall opportunities for
scientists to deploy efforts in this field. Lack of investments pose a threat even in the
short term: troops deployed in mission often face new or unexpected threats which call
for a quick generation of innovative solutions. This however “requires investing ex ante
in a large scope of technological bricks, with the relevant funding to deliver appropriate
performance and to be able to combine these bricks into new capabilities” (35
).
Moreover, in the long run the EU defence industry faces the serious threat of not being
able to develop the technologies of the future. As noted in the Group of Personalities
Report "R&T activities are the first necessary step to prepare for future capability
developments allowing for the maturing of technologies and the reduction of risks. The
defence R&T investment made today will underpin the freedom of action available
tomorrow, the preservation of operational and technological advantage, the
reinforcement of industrial competitiveness and employment opportunities" (36
).
The potential negative effects of reduced opportunities to engage in defence-related
research are indeed not limited to the defence sector only. Defence research, in particular
of explorative and forward-looking nature, can also be at the origin of major
32
European Political Strategy Centre (2015).
33
Council of the European Union (2016), p. 8.
34
European Union Institute for Security Studies and European Commission (2016).
35
Bellais (2018).
36
European Union Institute for Security Studies and European Commission (2016), p.43.
14
technological breakthroughs. Focused on technological superiority, rather than on
profitability, defence research can play a specific role in the process of innovation and is
often at the origin of major spin-off effects in the civilian economy (37
).
The difficulties that the sector faces are even more substantial as regards defence
development projects through which technology needs to transition towards final
products and technologies. Such projects, crucial for the competitiveness of the EU
defence industry, may not proceed forward, even if the initial stages of R&T have
already been funded. Bridging the "valley of death" between R&T and development is a
lengthy process that entails important technical and financial risks that individual
Member States may not assume on their own.
The development and testing of prototypes is a phase in the development process that is
particularly difficult because of the high costs involved and the important risks of failure
still present. At the development stage the distance to the acquisition phase is shorter,
which requires a high degree of customisation to the needs of a specific client. From
industry’s point of view this implies high level of asset specificity and substantial sunk
costs. The funding will be normally expected to come from the client.
2.2.2. Fragmentation and lack of collaboration between undertakings
Limited collaboration of Member States in defence implies duplications and results in a
defence industry that remains highly fragmented along national borders [B]. The
lack of integration on the demand side of the market, i.e. between Member States, indeed
fails to generate incentives for trans-border collaboration between undertakings and for
further integration of the industry.
The dependence on national markets still remains important in particular for those
companies that exhibit a high proportion of defence-related activities. Looking at 32
major European companies active in the defence industry a study (38
) notes that five
companies show a share of domestic sales in their turnover that is above 50% and for a
majority of 20 companies the proportion varies in the interval 20%-50%.
While Europe spends three times less on defence procurement and seven times less on
defence R&D, there are 36 defence platforms and systems in production in Europe
against only 11 in the US (39
). Unnecessary fragmentation implies a failure to capture
economies of scale and learning, important opportunity costs through reduced money
available to develop capabilities in other sectors and as a probable final result "European
countries become less technologically advanced; more expensive platforms and systems
37
See for instance Bellais (1999). The author also notes that project failure should not be necessarily negatively
perceived in the field of defence research: it provides a degree of reassurance that a given technological field cannot be
usefully exploited by a potential adversary to achieve a military advantage.
38
Masson (2015).
39
Briani (2013b). Fragmentation is the highest in the land segment with 17 open production lines in the EU against 2
in the US. In the naval segment the ratio is 5 to 1, while the air segment is more balanced.
15
obtain a narrower range of military capabilities in a less productive and innovative
industry" (40
).
Resulting duplications prevent the industry from achieving optimal size of production as
comparatively small national markets are served in isolation following the prevalence of
a “systematic bias in favour of a domestic solution” and “a domestically oriented
organization of R&D” (41
). 11 armoured infantry vehicles and personnel carriers are for
instance in production in Europe (42
).
Combat aircrafts provide another illustration of the fragmentation of the EU defence
industry, of the economies and efficiency gains foregone as a consequence and of the
resulting impact on industry’s competitiveness. Three types of combat aircraft are
currently in production in Europe: the Eurofighter Typhoon, the Rafale and the Gripen. A
2013 study on the costs of non-Europe in the defence field (43
) noted that the total R&D
costs of the three European projects together largely exceed those of the US-led Joint
Strike Fighter F-35 programme while the total expected output is almost 1,800 units
lower and divided between three different aircrafts which significantly reduces the
economies of scale and learning.
Annex 3 provides a more detailed assessment of this case. It shows that if only one of the
three above-mentioned European aircrafts had been developed and had realised sales
equivalent to those of the existing three programmes, the R&D cost per unit produced
could have been reduced by 41 to 76%. This very simple comparison only takes account
of the distribution of R&D costs over a larger production scale, but ignores the effects of
the other sources of economies of scale and learning.
Existing research clearly shows that the expected positive impact of increased scale of
production on the cost-effectiveness of the industry can be very significant – according to
different studies, costs reductions of 10-20% can be achieved when production is doubled
or increased from minimum efficient scale to the ideal level (44
).
It can be noted that even large trans-border consolidations have not necessarily led to a
genuine and deep consolidation of industrial assets at the EU level but have often led to
the creation of “multi-domestic” companies (45
). Nor has the prevalence of rigid work-
share arrangements based on the “juste retour” principle allowed achieving the full
potential of cooperative programmes to reduce duplications and market fragmentation.
The concluding remarks of the European Parliament’s study on the overall condition of
the European defence industry are that “all sectors show excess capacities in production.
40
Briani (2013b) p.2.
41
Bellais (2018).
42
Briani (2013b) p.3.
43
Briani (2013a).
44
McKinsey (2013), estimates that each doubling of volume results in an efficiency increase of approx. 20% that
would lead to total potential saving of 17% of the total weapon system procurement costs under the assumption of a
40% labour costs share. National Audit Office (2001), considers that equipment unit production costs could fall by up
to 10% as output doubles. Hartley (2006), estimates the median unit cost saving by increasing scale from the minimum
to the ideal level at 10-20%.
45
Bellais & Droff (2013).
16
This is expressed in many but small producers which are specialized in similar areas but
do not compete against each other for the first production lot due to markets with high
barrier for non-domestic suppliers” (46
).
The fragmentation of the European defence industry is not only limited to the weakness
of horizontal collaboration at the level of system integrators. It also affects cross-border
access to the defence industry supply chains. The latter have been predominantly set up
on a national basis (47
). Access for new suppliers, especially for those located in other
Member States, remains limited (48
) leading to low levels of cross-border engagement in
the defence industry’s supply chains. Dependence on defence markets is shown to
substantially and negatively affect the propensity of system integrators to resort to
foreign suppliers (49
). Data provided by the Organisation for Joint Armament
Cooperation ('OCCAR') regarding defence programmes managed by the organisation
(50
), estimates that approximately 5.6% of the value of the work performed in
programmes goes cross-border: 2.4% of the total workshare goes cross-border between
the 12 States participating in Programmes managed by the OCCAR (51
) and 3.2% goes to
other States.
Obstacles to the cross-border access to defence supply chains pose a serious challenge for
a large number of companies for which this is the only access to the market. These
companies represent the vast majority of enterprises involved in the defence industry as it
is estimated that the top Tier accounts for only 2% of the companies in the overall
industry supply chain (52
). The Final Report of the European Commission Advisory
expert group on cross-border access for SMEs to defence and security contracts
('Advisory Group Report on cross-border access for SMEs') explicitly recognised that
“the issue of cross-border market access and open supply chains is considered
particularly important for the functioning of the European Defence Equipment Market”
(53
). The existence of important barriers to cross-border engagement in the defence
supply chains is also clearly recognised by a recent study (54
).
Barriers to the cross-border participation in the supply chains have particularly negative
effects on SMEs’ capacity to take full benefits of participation in the defence market. As
noted in a Resolution of the European Parliament: “the fragmentation of the European
defence market is an obstacle to the ability of SMEs to market their products” (55
).
46
European Parliament (2013) p.47.
47
Constraints to cross-border engagement may for instance originate in reasons pertaining to national autonomy,
protection of the ownership of defence technology and associated spillovers, employment generation and economic
barriers such as higher costs of organisation and administration, transaction and search costs (Europe Economics
2018).
48
See for instance Ianakiev & Mladenov (2008); Ianakiev (2014).
49
Oudot (2017).
50
Data is based on a total of EUR 57.7 Billion, economic conditions March 2018 and relies on the Global Balance data
collected by the OCCAR that allows comparison between the workshare and the cost share of Participating States in a
Programme.
51
States participating in and spending money on an OCCAR Programme.
52
IHS (2016), p.25.
53
European Council (2016), p. 7.
54
Europe Economics (2018).
55
European Parliament Resolution 2013/2125(INI), point 31.
17
SMEs play an important role in the defence industry and are “a key enabler for
competitiveness” (56
). They have recognised strengths such as flexibility, innovativeness
and specialised knowledge (57
). A recent study (58
) identified almost 1,600 SMEs active
in the defence sector in Europe and estimated the total number of SMEs in defence
supply chains at 2,000-2,500.
Data on their involvement is however scarce. It is estimated that they account for
between 11 and 17 per cent share of the estimated defence equipment sales in the EU (59
).
The share however varies significantly across Member States and segments. Studies
report a lower participation of SMEs in the sector compared to the manufacturing sector
in general (60
). Defence R&D expenditures appear to be more concentrated in large
enterprises comparatively to other sectors, but SMEs active in the defence sector appear
to be investing more in R&D that other SMEs (61
). Data on the participation of SMEs in
defence R&D projects is extremely limited (62
).
SMEs in particular, but also suppliers in general, assume increasing responsibilities
through the extension of the use of risk-sharing partnerships by the large system
integrators where the costs and risks of development are distributed across system
integrator and partners in its supply chain (63
). System integrators may also exert their
market power to extract harsh financial conditions from suppliers thus limiting the
"cascading" of R&D funding down the supply chain (64
). Defence SMEs also face a
number of additional challenges: 1) they suffer from important information problems (65
);
2) they face difficulties in access to finance (66
); 3) they suffer much more from
administrative burden and costs (e.g. related to IPR protection); 4) they need to obtain
quick return on investment (67
). Mid-caps are also affected by some of these issues, but to
a more limited extent than SMEs (68
).
The problems described above have led to a situation where the defence industry in
Europe faces a serious threat of losing its innovative capacity and technological
superiority in global competition [C]. Europe’s capacity to develop and produce high-
tech systems needed for its defence is thus threatened.
56
European Commission Advisory Group Report (2016), p. 3.
57
See for instance Europe Economics (2009b) and Europe Economics (2018).
58
IHS (2017).
59
Europe Economics (2009b).
60
Europe Economics (2009a), Europe Economics (2009b) and Moura & Oudot (2016).
61
Moura & Oudot (2016).
62
Europe Economics (2018).
63
European Commission Advisory Group Report (2016).
64
Bellouard & Fonfria (2018).
65
E.g. difficulties in obtaining information on future capability requirements and business opportunities, but also a lack
of visibility to large companies, in particular in a cross-border context, which results in the presence of important
search and switching costs and of a preference for existing suppliers or suppliers closely located to the contractor (see
for instance Europe Economics (2018), Ianakiev & Mladenov (2008); Ianakiev (2014).
66
Europe Economics (2009b) and (2018), Bellouard & Fonfria (2018).
67
European Commission Staff Working Document SWD (2013) 279. The important difficulties that SMEs face in
developing their activities in the defence sector are also recognised by the EDA: "SMEs have identified a number of
difficulties in participating in the defence market including access to information, defence procurement, supply chain
and finance". "As defence supply chains have a substantial national focus, there are additional challenges for SMEs
that wish to enter defence supply chains in other European countries." European Defence Agency (2015), p. 3.
68
Europe Economics (2018).
18
2.3. Baseline scenario
As explained above, the current trends and identified problems and their drivers have not
been reversed nor is it likely that they will be in the near future. The existence of
cooperative mechanisms, such as under the EDA, have not been sufficient to reverse this
overall trend of diminishing volumes of R&D cooperation. Whilst initiatives like CDP
and CARD address some of the previously identified issues, notably by identifying
priority European defence capability gaps and scope for coordination of defence planning
and cooperation, and whilst PESCO offers a new framework for cooperative projects
between Member States, these initiatives neither specifically address the industrial angle,
nor do they include funding to incentivise collaborative projects.
Under the status quo (Baseline Scenario) the EU budgetary support under a small-scale
PADR with an annual budget of around EUR 30 million focussing on a limited number
of key research projects and under the EDIDP with an annual budget of around EUR 250
million would continue until 2027.
Given the costs of collaborative defence R&D projects and the long lifecycle of defence
equipment, it is unlikely that these two small scale actions would be sufficient to bring
about a sustainable and long-term change in the level of industrial cooperation and
innovative capacity of European defence industry. Main problems identified would not
be sufficiently addressed; collaborative investments in defence R&D projects would
remain comparatively limited.
Furthermore, the identified differences between the two programmes would continue to
exist, thereby foregoing scope for simplification and alignment and not responding to the
wishes of many Stakeholders.
Whilst other funding programmes under the 2021-2027 MFF are also to a certain extent
accessible for defence companies, they would not bring about the required change, as
they will not explicitly address the defence-specific problems described above. In case of
EU financial instruments limitations apply based on the European Investment Bank's
('EIB') lending conditions excluding the involvement in sectors as ammunition and
weapons as well as military/police equipment or infrastructure (69
).
The Baseline Scenario is therefore not the optimal scenario.
69
In response to the European Council call of 19 October 2017 on the EIB to examine further steps with a view to
supporting investments in defence research and development activities, the latter approved in December 2017 the
"European Security Initiative - Protect, Secure, Defend". As part of it the EIB will strengthen its support for Research,
Development and Innovation for dual-use technologies, cybersecurity and civilian security infrastructure. The objective
set by the EIB is ambitious as it targets EUR 6 billion in total financing for these sectors for the coming 3 years
compared to the same envelope for the period between 2001 and 2016. The EIB's list of areas excluded from financing
remains however unchanged.
19
2.4. Complementarity with other MFF programmes and Union's
initiatives
The implementation of the Fund will take place in close coordination with activities of
the Commission and the High Representative for Foreign Affairs and Security Policy in
the area of defence, including the Financial Toolbox. There will be close links between
the Fund and projects implemented in the framework of PESCO.
In order to ensure coherence and complementarity in the promotion of the defence
interests of the Union, under the 2021-2027 MFF the Commission will seek to ensure
synergies with other EU initiatives in the field of civil R&D, such as security and cyber
security, border control, coast guard, maritime transport and space.
In particular synergies should be sought with:
- the specific programme implementing Horizon Europe with a focus on civil
applications, so that results from defence R&D will benefit civil R&D and vice-versa.
The Fund only finances defence R&D actions aimed at supporting the capacity for
innovation and competitiveness of the defence industry in relation to high-tech defence
systems. The Fund does not support pure basic research, which should be supported by
other schemes, but it may include defence-oriented basic research likely to form the basis
of the solution to recognised or expected problems or possibilities. The projects to be
financed by the Fund may thus benefit from the results of research projects funded under
Horizon Europe. Results from Horizon Europe could be used for additional defence-
oriented research and development activities under the Fund, given that defence
applications have stricter certification and security requirements;
- the Union space programme, in particular its components Governmental Satellite
Communication (GOVSATCOM), Space Surveillance and Tracking Support (SST) and
Copernicus. This may be done notably by ensuring technical compatibility where the
projects make use of global navigation satellites system (GNSS) and GOVSATCOM
capabilities. This may also be done by developing upgraded sensors, exchange platforms
for classified data, applications based on data or information and services that are
provided by the space programme's components;
- EU initiatives in the field of cybersecurity; such as those announced in the Joint
Communication on cybersecurity (70
). In particular the cyber security competence centre
to be set up should seek synergies between the civilian and defence dimensions of
cybersecurity. It could actively support Member States and other relevant actors by
providing advice, sharing expertise and facilitating collaboration with regard to projects
and actions as well as when requested by Member States acting as a project manager in
relation to actions under the European Defence Fund;
70
Such as those announced in the 2017 Joint Communication "Resilience, Deterrence and Defence: Building strong
cybersecurity for the EU. The Joint Communication in particular notes that: “The high level of resilience required in
cyber defence calls for specific targeting of research and technology efforts.” It also notes that “The cyber defence
projects or technologies developed by undertakings could benefit from European Defence Fund”.
20
- the actions identified under the coordinated civil military maritime security research
agenda and with maritime transport, and;
- other relevant EU programmes in the field of security, such as the Internal Security
Fund and the Integrated Border Management Fund.
The Fund also complements defence activities implemented through the Connected
Europe facility (as regards military mobility) and the European Peace Facility, an off-
budget instrument proposed outside the MFF.
The defence sector has been proposed as an eligible sector for support through budgetary
guarantees under the InvestEU Fund which is put forward as a cross-sectoral and over-
arching framework supporting investment in various policy fields, underpinned by an EU
budgetary guarantee.
Financial instruments, which may take the form of equity or quasi-equity investments,
loans or guarantees, targeting the defence sector are not in place under the current MFF.
Their future deployment under the InvestEU Fund will thus make an important addition
to the actions supported under the Fund, also considering the budgetary efficiency of
these instruments. Financial instruments reduce financial risk, but contrary to grants, cost
sharing is limited to situations in which risks materialise.
The possibility to use financial instruments for defence-specific research activities is
more limited as market uptake is usually not imminent and the specificities of the sector
imply important difficulties in estimating the possibilities for the technology to be met by
demand. However, financial instruments for defence development projects, which
involve very substantial costs and important risks, could be possibly useful to support
projects in specific situations where for instance important civil spin-offs or large
volumes of sales to other States are foreseen.
Also the availability of financial instruments can be important if despite EU funding
being provided at the top levels of the supply chains, severe constraints are still present
hampering participation by suppliers located down the supply chains (71
). This may put
some suppliers in a situation where they need to wait for the production phase to recover
R&D investments made for the project (72
) with all the additional risks that this implies
(73
). Budgetary guarantees can be a fiscally efficient way to address risks in the supply
chain and could facilitate its participation in individual projects by addressing the risks or
capital funding bottlenecks encountered at that level (74
).
71
Such constrains may stem from acknowledged disadvantages of SMEs engaging in defence-specific R&D to access
finance that may be particularly acute for SMEs and mid-caps (Europe Economics (2009), Europe Economics (2018)).
The difficulties encountered can be further reinforced by the increased reliance on risk-sharing partnerships and even
the of exercise of market power by Prime contractors.
72
Bellouard & Fonfria (2018).
73
For instance, Member States, as a sole client, may decide not to proceed with the production phase, or the supplier
may not be retained in that phase.
74
Unless such needs are already sufficiently covered by horizontal EU financial instruments whose availability may
increase in case of a change of the restrictions to the lending or investment policy of the EIB or if other institutions are
granted access to EU-supported Guarantee Funds in the future.
21
The extent to which financial instruments can be applied depends on the extent to which
limitations continue to be applied in the lending policy of financial intermediaries
(notably the EIB) towards defence-specific activities (75
).
To enable full synergies to be exploited, it is proposed to introduce the possibility of
blending support under the Fund with the provision of financing backed by the Invest EU
Fund.
The possibilities for deployment of financial instruments in the defence sector are
amongst the elements explored in the framework of the Financial Toolbox developed by
the Commission together with Member States. More generally, the Financial Toolbox,
which is separate from the current legislative proposal, aims to further facilitate joint
development and acquisition of defence capabilities through the standardisation of EU
and national financing mechanisms ranging from pooling to joint ownership. The
financing models for capability acquisition included in the Financial Toolbox can also
serve as a voluntary reference for Member States wishing to jointly procure the products
and technology developed through the European Defence Fund and the Commission will
thus ensure that the full potential for synergies is achieved.
2.5. Objectives and eligible actions
The Fund will support and incentivise collaborative defence research and development
projects in the EU by providing funding from the EU budget, thus contributing to
addressing capability shortfalls in the EU. The intervention aims at funding the entire
cycle of collaborative research and development of cutting edge defence technologies
and systems for modern armament and equipment programmes.
The Fund finances projects in line with capability priorities commonly agreed by
Member States within the EU within the framework of the CSDP.
2.5.1. General objective
In the above context, the general objective is to foster the competitiveness, efficiency
and innovation capacity of the European defence industry, by supporting collaborative
actions and cross-border cooperation between legal entities throughout the Union,
including SMEs and mid-caps as well as fostering the better exploitation of the industrial
potential of innovation, research and technological development, at each stage of the
industrial, thus contributing to the freedom of action of the Union and its autonomy, in
particular in technological and industrial terms.
2.5.2. Specific objectives
Two specific objectives can be defined relating the research and development actions.
75
Alternatively, the possibility of enlarging access to the relevant Guarantee Funds to institutions which are not bound
by such restrictions could be contemplated. The viability of the latter possibility will however depend to some extent
on the ability of such institutions to ensure equal access to the relevant financial instruments across the EU.
22
(a) Support collaborative research projects that could significantly boost the
performance of future capabilities; aiming at maximising innovation and introducing new
defence products and technologies, including disruptive ones;
(b) Support collaborative capability development projects of defence products and
technologies consistent with defence capability priorities commonly agreed by Member
States within the framework of the Common Foreign and Security Policy, thus
contributing to greater efficiency in defence spending within the Union, achieving greater
economies of scale, reducing the risk of unnecessary duplication and as such reducing the
fragmentation of defence products and technologies throughout the Union. Ultimately,
the Fund will lead to greater interoperability between Member States' capabilities.
2.5.3. Actions to be financed to achieve the general and specific objectives
The scope of the actions will include actions from the lower level of maturity (upstream
technology) up to the higher levels resulting in development and as such take into
account short-, mid- and long-term capability needs. The scope of the actions should thus
range from research in critical defence technologies, future and emerging disruptive
technologies, defence technology demonstrators, the feasibility and definition stage,
design, prototypes, testing and up to standardisation/certification.
To support and leverage cooperation, only collaborative cross-border actions should be
financed consisting of consortia of at least three entities based in at least three different
Member States.
Given the Fund's general objective of fostering the European defence industrial and
scientific base, only legal entities established in the Union or associated countries
should be eligible for support. To ensure the protection of essential security interests of
the Union and its Member States, the infrastructure, facilities, assets and resources used
by the beneficiaries and their subcontractors in actions supported by the Fund should not
be located on the territory of non-EU States/associated countries. Beneficiaries of the
Fund and their subcontractors should not be subject to control by a third country or third
country entities. The Regulation frames exceptions, which are subject to conditions being
met.
In view of the observed negative effects in case of a failure to agree on common
technical specifications, this should be a condition in order to benefit from the Union's
support as regards in particular prototypes. Also the intention of Member States to
procure, including in the form of joint procurement, the final product or use the
technology is a requirement for actions concerning prototyping or later development
stages.
Figure 6 illustrates the objectives and conditions as regards the actions to be financed by
the Fund.
23
Figure 6: Objectives and actions
3. PRIORITIES, RIGHT TO ACT, BUDGETARY AMOUNT
3.1. Prioritising actions
The priorities for research and capability development will be essentially based on the
input from Member States, which set the defence priorities in the framework of the
CSDP (76
). The Fund will be informed by the priorities identified notably through the
CDP and will take into account CARD, notably as regards the implementation of these
priorities and the identification of new cooperative opportunities. Through this process,
Member States will be incentivised to compare and define their projects and find
common ground.
The priorities for funding will be defined in the annual or multi-annual work-
programmes drafted by the European Commission. The work programme will take the
form of implementing acts that will be adopted in line with comitology procedures,
where on a proposal by the Commission, a Programme Committee of Member States
votes by qualified majority. Given its specific role in the EU Treaty in supporting the
CSDP policy, the EDA will have an observer status to provide its views and expertise
and the European External Action Service will be invited to assist.
Once adopted the work programme will be implemented through projects normally
selected with the help of independent experts after a call for proposals.
76
Where appropriate, regional and international initiatives can be also taken into account when they serve the Union's
security and defence interests.
general
obejctive
•foster an innovative and competitive European industrial and scientific base to
meet Europe's priority defence capability needs by supporting collaborative
research and development actions between legal entities, including SMEs and mid-
caps
specific
objecitives
•support collaborative research projects of defence products and technologies
•support collaborative capability development projects of defence products and
technologies
eligible
actions
• (scope): full R&D cycle from defence-oriented basic research up to certification.
•(consortia): at least three entities based in at least three different Member States
•(geographic): Union or associated countries
•(entities) In principle Union and associated countries controlled entities.
•(as of prototype stage) intention from buyers to procure, including through joint
procurement
•(as of prototype stage) actions based on common technical requirements
24
3.2. The right to act
3.2.1. The intended legal base
The European Defence Fund aims at fostering the competitiveness and innovativeness of
the EU's defence technological and industrial base by supporting defence-oriented R&D
activities. It is based on the TFEU Titles 'Industry' and 'Research and technological
development and space' (Articles 173, 182, 183 and 188).
Article 173 of the Treaty on the Functioning of the European Union (TFEU) constitutes
the legal base for actions aimed at, inter alia, encouraging an environment favourable to
the development of undertakings throughout the Union, particularly SMEs, and
favourable to cooperation between undertakings and fostering better exploitation of the
industrial potential of policies of innovation, research and technological development.
As the Fund aims at fostering the competitiveness and innovativeness of the EU's
defence technological and industrial base by supporting defence-oriented R&D activities,
its aim and its content justify the choice of 173 TFEU as legal basis. Defence-oriented
research actions also form an integral part of the European Defence Fund. Their aim and
content also justify Article 182 TFEU as an additional legal basis.
Pursuant to the TFEU all research activities shall be covered by a multiannual framework
research programme. The basic act of the multiannual research and innovation
framework programme post-2020 Horizon Europe contains the necessary provisions
establishing setting out the links between the framework programme and the specific
programmes established by it on defence research and on implementing Horizon Europe
(which has a focus on civil applications of research and innovation activities).
The detailed provisions for Union funding to defence research projects and its budget
allocation are fixed in the current Regulation on the European Defence Fund, which
defines the rules of participation for defence research. Research and innovation activities
carried out under the European Defence Fund have an exclusive focus on defence
applications.
3.2.2. The subsidiarity (EU added value) and proportionality
In today's world, guaranteeing security means dealing with threats that transcend borders.
No single country can address these alone. The EU will need to take greater
responsibility for protecting its interests, values and the European way of life, in
complementarity and in cooperation with NATO.
Efforts to meet the EU's level of ambition in security and defence (as endorsed by the
European Council in 2016) will contribute to this objective. To be ready to face
tomorrow's threats and to protect its citizens, the EU needs to enhance its strategic
autonomy. This requires the development of key technologies in critical areas and
strategic capabilities to ensure technological leadership. Greater cooperation at all levels
is the only way to meet EU citizens' expectations.
25
By encouraging cooperation, the EU can help maximise the output and quality of
Member States' investment in defence. The Fund will bring EU added value by
incentivising joint research on and development of products and technologies in the area
of defence to increase the efficiency of public expenditure and contribute to the EU's
operational autonomy.
Decisions on defence investments and defence development programmes remain the
prerogative and the responsibility of Member States.
The proposed policy approach can be expected to be proportionate to the scale and
gravity of the identified problems. The decision to sustain investments in defence and
launch defence development programmes remains the prerogative and the responsibility
of Member States. The EU cannot and should not make up for the low levels of defence
investments of Member States. However, as explained in Section 2 it can complement,
leverage and consolidate their collaborative efforts in developing defence capabilities to
support the European defence industry and respond to security challenge. This would
avoid duplication, allow for a more efficient use of taxpayers' money, improve the
interoperability of defence equipment, minimise fragmentation and boost
competitiveness and innovation in the European defence technological and industrial
base.
The initiative is therefore clearly limited to goals that Member States cannot achieve
satisfactorily on their own and where the EU can be expected to do better. The proposed
Fund will aim at limiting financial and administrative costs.
3.3. Appropriateness of the budgetary amount
The Commission proposed the budgetary amount for the Fund in its proposal for the
MFF 2021-2027: EUR 13 billion (current prices) of which EUR 4.1 billion to fund
collaborative defence research and EUR 8.9 billion to fund collaborative defence
development projects. The proposed budget of the Fund for the MFF 2021-2027 has the
appropriate magnitude to achieve a genuine impact.
As regards defence research investment, taking into account the scale of existing
national defence research budgets and the high costs of developing cutting-edge defence
technologies, an annual budget of EUR 585.7 million appears appropriate in order to
make a substantial difference. It is in line with the conclusions of the Group of
Personalities Report (77
), as well as with the report of the European Parliament on the
European Defence Union of November 2016 (78
). With an investment of EUR 585.7
million on an annual basis the EU will match the Member States with the highest levels
of R&T funding. If the data for 2014 is used as a reference and the UK is excluded, the
Fund’s contribution will account for approximately 28% of the total defence R&T effort
in the EU. Indeed, the total European expenditure on defence R&T amounted to
77
European Union Institute for Security Studies and European Commission (2016).
78
European Parliament report on the European Defence Union (2016/2052(INI) adopted on 22 November 2016 which
notes that "the European Defence Research Programme will need a total budget of at least EUR 500 million per year
over that period in order to be credible and make a substantial difference".
26
approximately EUR 2 billion annually (79
) in 2014. France spent approximately EUR 750
million, Germany and UK just below EUR 500 million annually. Under the same
assumptions an EU investment of EUR 585.7 million would result in an increase from
1.03% to 1.42% of the share of defence R&T in total defence spending, thus providing a
significant contribution in closing the gap with the 2% EDA Benchmark. The share of
EU collaborative defence R&T in total defence R&T will thus substantially increase to
36.26%, a percentage that is largely superior to the EDA Benchmark of 20%.
Defence development expenses in Europe in 2014 were approximately EUR 6.8 billion
in 2014 (80
). If the UK is however excluded, the figure is reduced to slightly more than
EUR 3.5 billion. On this basis, an annual EU contribution of EUR 1.27 billion will
represent approximately 26% of the total defence development spending and will make a
substantial addition to Member States efforts in this field. Moreover, considering that in
most cases the EU is expected to co-finance development projects, the total value of the
investments realized, including the part co-funded by Member States or other sources,
will range between EUR 1.27 billion and EUR 6.35 billion per year depending on the rate
of EU co-financing. No Benchmark concerning defence R&D expenses has been adopted
in the EDA framework, but the data on the benchmark on collaborative defence
equipment procurement presented in 2.1.3 shows a significant “collaboration deficit”.
Taking into account the average ratio of R&D to equipment expenses in EDA
participating Member States, a study has estimated that the necessary collaborative R&D
expenses to resorb this deficit would range between EUR 700 million and EUR 2 billion
per year (81
).
3.4. Introduction of Options
In order to assess as to how to deliver in the most optimal manner on the set objectives
and the eligible actions, current experience - however limited it may be - needs to be
taken into account as well as possible scope for further alignment and simplification, the
political consensus that has been reached on the EDIDP, the comments received from
Stakeholders.
Three Options will be assessed below focusing mainly on the best Fund architecture and
delivery mechanisms, which have been built on two criteria: their structure as compared
to the Baseline scenario and the depth of the changes that they introduce compared to the
Baseline. In all three Options the budget is substantially higher than the Baseline scenario
in line with the Commission's proposal for the MFF 2021-2027.
1.1.1. Option 1: Continuity
79
Based on the EDA Defence Data for the 27 EDA participating Member States (European Defence Agency 2016).
80
Based on EDA Defence Data. The amount of development expenses is calculated by subtracting the amount
corresponding to defence R&T from the data provided on defence R&D (European Defence Agency 2016).
81
Mauro (2017). The variation takes account of different assumptions on the evolution of spending in respect to the
EDA benchmark of investment and R&D expenses reaching 20% of total defence expenditure as well as the North
Atlantic Treaty Organization spending target of 2% of GDP.
27
Option 1 is based on a maximum level of continuity with the PADR and the co-
legislator’s consensus on the EDIDP albeit with more than six times higher budget.
1.1.2. Option 2: Flexibility and simplification
Option 2 builds on Option 1, but proposes to simplify the Fund's Structure by integrating
the two windows in one single Fund covering the scope of the PADR the EDIDP. Option
2 also introduces some limited content changes, for instance by expanding the scope of
the instruments to achieve the Fund's objectives; thereby offering further flexibility and
simplification for beneficiaries.
1.1.3. Option 3: Prescriptive
Option 3 builds on the changes introduced in Option 2 as regards the Structure and the
scope of instruments, but replaces other features of Option 1 and 2 thereby changing the
approach based on incentives and bonuses under Options 1 and 2 with a more
prescriptive approach with obligations and a reinforced EU role. Option 3 represents an
attempt to be more intrusive in addressing the identified problems through a more
directive approach.
The logic behind such definition of Options is presented in Figure 7 below.
Figure 7: Definition of the Options
4. DELIVERY MECHANISMS OF THE INTENDED FUNDING
A detailed assessment of the key differences between the Options and of their main
advantages and limitations is presented below; after which the trade-offs between each of
the Options is analysed in terms of their ability to deliver the objectives in most the
optimal manner.
4.1. Structure, delivery mechanisms and related IPRs varying across the
Options
The Options relate to variables in relation to the Fund's Structure, including: governance
(4.1.1.); general delivery mechanisms including funding instruments, funding levels
(4.1.2.), IPR aspects (4.1.3.), and defence-specific mechanisms linked to the promotion
of cross-border and SME participation, PESCO-related aspects and continued
28
cooperation (4.1.4.). The visual representation of such factors is provided in Figure 8
underneath.
Figure 8: Array of delivery mechanisms across the three options
4.1.1. Programme Structure and Governance (management)
Under Option 1 the existing structure and governance of the Baseline scenario would
continue with a higher funding level; meaning two separate Programmes. Although such
Structure has the obvious advantage of providing certainty and continuity, it does not
take account of efficiency gains of streamlined processes for the two windows, which has
been put forward as a critical success factor by Stakeholders (1.2.2), and scope for
alignment of rules of participation. Having different structures might lead to confusion,
coordination problems and foregone opportunities for coherence and streamlining.
Under Option 2 and 3, compared to the Structure under the Baseline scenario of having
two separate programmes, one single Fund would be set up. It would allow a better
harmonisation of rules of participation between PADR and EDIDP in view of supporting
the full cycle of defence-oriented research and development of defence capabilities to
ensure the uptake of research results in the development stage.
Concerning Governance, the Fund would be implemented under a single management
mode. Under Option 2 and 3 the Fund would be implemented directly by the
Commission. Such structure would best ensure simple, streamlined and lean processes. It
also is the most optimal way to allow the Commission to control, monitor, and possibly
29
correct implementation and assume its accountability towards the budgetary Discharge
Authority in line with its obligations under Article 317 TFEU. The financial expertise in
implementing the EU budget, which is the main element for the implementation, is
available in the Commission. In view of the specificities of the sector, management needs
to be done in a secure manner. The Commission has the infrastructure and IT-systems to
ensure secure handling and exchange of EU Classified Information (EUCI). Regulation
1049/2001 on access to documents foresees several protection layers to ensure
confidentiality of defence documents.
Direct management would also recognise the role and needs and technical expertise of
end-users (military) and national governments (Ministries of Defence) when defining
defence priorities and when managing projects at technical level. Comitology procedures
at work programme level ensure technical input from Member States.
4.1.2. General delivery mechanisms
4.1.2.1. Instruments
Under Option 1 the Fund would continue to rely on the main instruments used for
research and development actions in the PADR and EDIDP under the Baseline scenario,
which are principally direct grants to legal entities and to a lesser extent procurement
with regard to studies. The grant instrument is a broadly tested instrument not needing
major further adaptations to be applied to the defence sector. It is an appropriate
instrument to promote defence research and development activities. However, this
Option does not provide a response to Stakeholder feedback advocating for more
flexibility and funding possibilities that better adhere to the specificities of the sector.
Under Option 2 and 3, the Fund could introduce further flexibility and build on
experience with more innovative instruments gained through other existing Union
programmes, which allow for example for a) grants to groups of buyers to allow for PCP
and b) for prizes to support demand for innovative solutions and user-driven innovation.
It also allows for c) the use of financial blending operations.
a) Grant to a consortium of buyers:
In the 2014-2020 MFF other Union Programmes started to apply more innovative grant
instruments to fund a group of procurers ('buyers group') to undertake together joint PCP
in cases where there needs to be a close link between procurer ('public buyer') and the
contractor ('research organisation or company'). Given these specifics the innovative
instrument of using grants to finance PCP could be a suitable solution in certain cases to
achieve the objectives of the Fund. The advantage may be that it follows well the
business reality in the sector and allows EU budget financing to feed into a project
between industry and Member States where the management is done by the buyers group
of Member States usually through a contracting authority/project manager.
b) Prizes:
Also prizes could be a suitable instrument for specific defence research activities where
organisations compete in offering the best solution to a specific technological challenge.
30
c) Blending operations:
As explained in Section 2.4, the defence sector is proposed to be an eligible sector for
support through budgetary guarantees under the InvestEU Fund. In order to allow the
exploitation of the potential of blending operations, combining funding provided under
the European defence Fund and the provision of financing backed by the InvestEU fund,
a standard clause enabling such operations is introduced under Options 2 and 3.
The combination of project-oriented support under the Fund along with targeted
financing in the defence sector can make a powerful contribution to strengthening the
resilience of the sector and addressing the vulnerabilities observed, in particular for
innovative SMEs and Midcaps.
4.1.2.2. Funding rates and reimbursement methods
Under Option 1 the funding rates will remain unchanged in comparison with the
Baseline scenario. More projects would nevertheless be financed because of the higher
budget available. Reimbursable eligible cost for grants will continue to be calculated ex-
post on the basis of a cost declaration ('cost declaration method'). Indirect cost will be
covered by continuing to use a 25% flat rate of total eligible direct costs excluding
subcontracting. The advantages are that this is a well-established method to which
participants of Horizon 2020 and PADR are used. Although the use of a flat rate limits
administrative burden, the disadvantage is that it does not take into account concerns of
Stakeholders on the funding levels for indirect costs being insufficient considering the
specificities of the sector.
Option 2 takes account of the concern of Stakeholders that funding levels for indirect
cost are too low in the methodology applied in the Baseline scenario. The specific
characteristics of the sector, including the dependence on a single buyer and the
important limitations to commercially exploit the results from defence-oriented R&D,
should be acknowledged. Under Option 2, flexibility will be introduced allowing better
covering indirect cost, where appropriate.
Option 2 also introduces the possibility for simplification measures in relation to the
reimbursement method for grants to lower administrative cost through a single lump sum
contribution. However, the risk in relying on lumps sums is that ex-ante estimations
could be either too high, which would come at a cost for the budget, or too low which
may lead to low uptake. It is also not a broadly tested method and the Commission has
limited experience in setting the right level of lump sum due to different costs in the
various EU Member States. In the present case such risks would be mitigated by using
the lump sum cost calculation for development projects where the majority of costs are
co-funded by Member States/ associated countries relying in their experience in
determining cost reimbursement levels for such projects.
Option 2 also takes into account that actions beyond the prototype phase and thus closer
to product and technology finalisation may involve lower risks, whilst at the same time
involving still substantial cost and needing continued commitment from Member States/
associated countries to cooperate at these later stage of development. In balance, under
31
Option 2 the EU co-funding for R&D actions beyond the prototype stage would be
capped at 80%. This maximum level of funding would still provide the necessary
flexibility to achieve the objectives of the Fund.
Under Option 3, a greater Union involvement as regards the development of prototypes
would be established by providing a higher standard EU co-funding rate for prototypes.
Whilst this may seem attractive, there are important drawbacks. Higher funding by the
Union and lower co-funding by Member States may go against the wish of Member
States to stay in lead of the project in the prototype phase allowing them to take decisions
as to project structure, workload distribution etc. A higher involvement of the Union may
be received as too intrusive at the development stage and being a minority partner may
also lower the commitment of participating Member States. It is also important to ensure,
at this crucial stage of the development process, that Member States have the necessary
commitment to and ownership of the project. This can only be achieved through a
significant financial commitment of Member States. A cap (for example of 50%) for EU
funding of prototypes could be envisaged to address the above risks. It may however
have financial budgetary implications risking that the first prototypes financed already
absorb a large portion of the available budget.
4.1.3. Intellectual Property Rights
Intellectual Property Rights (IPR) arrangements in the area of publicly funded research
and development need to strike a balance between maximising the impact of the public
funding for the benefit of the taxpayer and making attractive for the research community
and industry the participation to the Fund.
Under Option 2 the core IPR arrangements are the same as those under the Baseline
scenario.
As regards research actions, results of actions are owned by the beneficiaries generating
them beneficiaries with small restrictions and right to use other co-beneficiaries' results
for the exploitation of their own results under terms and conditions. The Union has a
royalty-free access to all the results for non-competitive and non-commercial use.
Member States/ associated countries have royalty free access to a report, which provides
them with all the necessary information to assess the content of the action and of the
results, without revealing information on know-how. In the case that at a later stage, two
or more Member States/ associated countries conclude a contract with a beneficiary of a
project to further exploit the results funded by the research window of the Fund and
owned by the participant, these Member States/ associated countries have royalty free
access to those results.
As regards development actions, in consistence with the EDIDP, the Union will not own
IPRs resulting from the actions funded under the Fund, as at this stage of the
development the Fund is mainly co-funding the development of defence products and
technologies. It is for the Member States/ associated countries, together with
beneficiaries, to define IPR arrangements.
32
However, when the Commission procures a study, it will own the IPRs and grant
Member States and associated countries a non-exclusive licence for use.
Under Option 3, additional measures could be introduced to better allow the Union to
ensure that the results are available in the EU and ensure its strategic autonomy. Under
Option 3 for development projects with the co-funding of Member States/ associated
countries and low EU budget contribution, the rules could be aligned to those of the
PADR e.g. by asking a royalty free access right for the Union and providing a report to
all the Member States/ associated countries.
However, Option 3 is not yet mature and the described possibilities have not been
properly tested or discussed with Member States or the wider stakeholder community.
For these reasons this Option is not recommended to be implemented at the outset of the
Fund. Possibly Option 3 could be further considered at a later stage when more
experience with the IPR provisions has been attained and if Stakeholders agree on the
added value.
4.1.4. Defence-specific characteristics
4.1.4.1. Cross-border participation of SMEs and Mid-Caps
As explained in Section 2.2.2 cross-border participation at the level of the defence
industry supply chains is very limited and this affects in particular SMEs and to a lower
degree mid-caps.
The very introduction of an EU Fund supporting collaborative research and development
projects significantly contributes in fostering cross-border collaboration between legal
entities, including in the defence supply chains. The initiation of common cross-border
EU projects was one of the key recommendations of the Advisory Group Report on
cross-border access for SMEs (82
).
Measures aiming at enhancing cross-border participation and participation of SMEs and
mid-caps in projects supported by the Fund can also be enacted in different ways.
Under the Baseline scenario, under the PADR annual work programme included topics
where SMEs have higher chances to participate. For some specific calls for proposals, a
wider collaboration was also required taking the form of an increased minimal number of
participants from more Member States.
As regards the EDIDP, several dedicated measures of incentivising nature have been
introduced in the Programme’s base legal act:
 an award criterion for participation of SMEs and of cross-border SMEs (83
)
82
Advisory Group Report (2016) on cross-border access for SMEs, p.15. The report also advocates for investing more
extensively in R&T in order to “create additional business opportunities and enable supply chains to expand more
easily and to be more flexible.
83
SMEs which are established in Member States other than those where the undertakings in the consortium which are
not SMEs are established.
33
 EU funding rate bonuses for: participation of SMEs; participation of cross-border
SMEs; participation of mid-caps84
 An obligation to include a specific category of projects dedicated to SMEs in the
work programme
 a global target specifying that the work programme should ensure that at least 10% of
the overall budget will benefit the cross-border participation of SMEs
Considering that complex combinations of different funding rate bonuses can in
particular make the budget allocation per category of projects extremely difficult, a cap
to the overall increase of funding rates through bonuses has been fixed at 35 percentage
points.
Under Option 1, the different approaches under the Baseline scenario as adopted for the
PADR and the EDIDP will be preserved, taking in particular into consideration that some
of the dissimilarities can be linked to specific features distinguishing research from
development. For instance, research actions being fully funded by the EU budget, EU
funding rate bonuses are rendered inoperable by definition (85
).
To operate efficiently a system based on incentives however needs to be sufficiently
simple and well targeted. It will also benefit from a strong focus on stimulating the
participation of those categories of enterprises which face the highest barriers instead of
dispersing the efforts. A high complexity and administrative burden can also undermine
the efficiency of such a system in addressing the barriers to cross-border collaboration.
Option 2 therefore foresees a simpler system that focuses on the main issue at stake, i.e.
the cross-border participation of SMEs and mid-caps (86
). It relies mainly on two
components: EU funding rate bonuses for cross-border participation of SMEs and mid-
caps and an award criterion incentivising the creation of new cross-border cooperation, in
particular through the cross-border participation of SMEs.
The focus of the bonuses is put on the most challenging issue: the cross-border
participation of SMEs and mid-caps. Stronger incentives are provided for the cross-
border participation of SMEs considering that they are affected by some types of barriers
to a higher degree than mid-caps. This allows concentrating the incentives on the
inclusion of those companies that suffer from both disadvantages linked to size and from
barriers to cross-border participation. Funding rate bonuses also take into account the fact
that increased cross-border participation may also have a cost, for instance in the form of
84
Defined for the purpose of the EDIDP Regulation as meaning enterprises having a number of employees up to 3,000
where the staff headcount is calculated in accordance with Articles 3, 4, 5 and 6 of the Title I of the Annex to the
Commission Recommendation 2003/361/EC and which are not SMEs.
85
Absence of co-funding also implies lower political pressure on the definition of the industrial organisation of the
projects. In addition, in research projects the number of participating entities is expected to be lower in comparison
with important development projects.
86
Europe Economics (2018) finds evidence pointing at “significant barriers to cross-border engagement … while
problems faced by SMEs in a purely national context appear to be of a less significant magnitude” (Europe Economics
2018, p. 36).
34
additional coordination, transaction and supplier searching costs that may be necessary
when establishing new industrial partnerships (87
).
Flexible bonuses (88
) have been chosen as they provide a continuous incentive and
minimise the risks linked to possible errors in the definition of the thresholds. A cap to
the overall increase of EU funding through bonuses (for cross-border SMEs and mid-
caps participation and PESCO projects) ensures that the level of ex ante uncertainty
about the exact amount of EU funding that would be necessary for a specific call will
remain limited and will not pose a problem for the efficient implementation of the Fund.
Bonuses are however applicable only to eligible actions that are not fully funded by the
EU and, as a consequence, are not applicable to research actions in particular. The award
criterion usefully complements the bonus system, incentivising when the latter are not
applicable and rewarding increased levels of cross-border participation.
The introduction of a category of projects dedicated to SMEs in the work programme is
not a direct answer to the core issue of incentivising the integration of cross-border SMEs
and mid-caps in the supply chains of the large industrial players. Therefore no obligation
for including such a category in the work programmes is proposed in the base legal act.
Nothing however prevents the possibility to introduce such a category in the work
programmes, especially if the experience under the EDIDP proves to be positive. The
definition of the work programme will also take into account the need to enhance the
possibilities for cross-border participation and of SMEs and mid-caps.
Within the logic of Option 3 the approach based on incentives would be replaced by a
stricter set of mandatory requirements and targets applicable at the level of individual
projects. Moreover, unlike under Options 1 and 2 where full freedom is left as regards the
process through which sub-contractors will be selected, Option 3 could impose, for a
specified share of the value of a supported project, the use of procedures for the selection
of sub-contractors such as open, fair and transparent competitive calls accessible to all
EU legal entities fulfilling the conditions specified in the Fund’s legal base.
Mandatory targets at project level would have the advantage of triggering immediate
change in the industrial organisation of projects through a more deterministic process.
Focus would shift towards achieving concrete results determined ex ante. Such an
approach however requires high levels of precision in defining appropriate quantitative
targets and requirements. It implies a higher level of Commission intervention. In a field
where previous experience is more than limited and reliable data and information is
scarce, the risks involved would be substantial. In particular, if targets for cross-border
and SME participation are too demanding, the uptake of the Fund could be endangered as
consortia would fail to fulfil the necessary criteria. Alternatively, unrealistic requirements
may induce an artificial industrial organisation that would lead to inflated costs and
distortions thus potentially defeating the very objective pursued.
87
Europe Economics (2018).
88
Where the EU funding rate is increased proportionally to the degree of cross-border participation of SMEs and mid-
caps.
35
Imposing open section procedures will balance the advantages of higher transparency in
the selection of suppliers against increased administrative burden and complexity. In
addition, it is worth noting that previous experience with such systems implemented on a
voluntary basis has not necessary brought satisfactory results (89
).
4.1.4.2.PESCO
Eligible collaborative actions developed in the context of PESCO should ensure
enhanced cooperation between different Member States on a continuous basis and thus
directly contribute to the aims of the Fund. Such projects should thus be eligible for a
priority treatment.
Under Option 1 and 2 the PESCO bonus would continue as it is proposed now under the
Baseline scenario for EDIDP, meaning that for selected projects that are also undertaken
in PESCO context ('PESCO projects') a financial bonus of 10% will be given.
Under Option 3, in addition to a bonus, the Fund could foresee that work programme
would give priority to PESCO projects that fulfil the eligibility and award criteria.
PESCO projects eligible for the Fund could also get direct funding without competitive
selection. Whilst such elements can reinforce the links of the Fund with PESCO, the
value added of their introduction is very limited as the Programme Committee can
already decide to consider PESCO projects as priority. The introduction of the
abovementioned elements may meet resistance from Member States, including from
those who do not participate in PESCO that may consider that this will restrain
unnecessarily the decisions of the Programme Committee. The approach proposed under
Option 2 is thus considered preferable.
4.1.4.3.Demonstration of an intent to collaborate beyond the procurement phase
As mentioned in Section 3.1 a collaborative approach covering the entire life-cycle of
defence equipment allows rationalisation of through-life costs and enables very
substantial efficiency gains and economies to be realised. Nevertheless, collaboration at
the level of R&D and even procurement does not guarantee that the following stages will
also be performed in a collaborative manner enabling the materialisation of the full
potential economies and the preservation of the initial levels of interoperability. A good
example of this is provided with regard to the Transall collaborative project: “The
Transall was a joint effort of France and Germany, but once the Transall was put into
service cooperation ended. It is now impossible to exchange a French with a German
Transall because the spare parts are no longer the same and the operational function of
each has evolved in different ways” (90
).
Under Option 1 and 2 the Baseline scenario would continue whereby the consortium
demonstrates for development actions that at least two participating Member States and/
or associated countries intend to procure jointly the final product or use the technology in
89
An example of past experience in this field is provided by the Electronic Bulletin Board established in the
Framework of Code of Best Practice in the Supply Chain of the European Defence Agency.
90
European Union Institute for Security Studies, 2007, p.21.
36
a coordinated way. An award criterion is also in place taking into account the potential
efficiencies across the lifecycle of the developed defence projects and categories.
Under the logic of Option 3, for actions pertaining to prototyping, testing, qualification
and certification it could be envisaged to require the formal demonstration of the intent of
Member States/ associated countries not only to procure, but also to continue
collaboration beyond the procurement phase by performing jointly activities such as
maintenance, repair and overhaul. A risk however exists that Member States/ associated
countries may not be willing to demonstrate such intent so early in the development cycle
which could reduce the number of projects proposed for funding and may endanger the
achievement of the Fund's objectives. In addition, actions where Member States would be
ready to provide evidence of their intent to collaborate beyond the procurement can be
catered for through the award criterion already in place under Options 1 and 2.
4.2. How do the Options compare?
This section presents a short overview of the above presented three Options evaluating
their efficiency and effectiveness in achieving the elements of the general objective of the
initiative. It also assesses to which extent each option adheres to the overarching MFF
objectives of simplification, flexibility, coherence and synergies and focus on
performance.
Table 1: Comparison of Options
Option 1 Option 2 Option 3
Elements Fund's general
objective
Support collaborative projects
through the entire R&D cycle + ++ +
Leverage cooperation
between legal entities,
including SMEs, mid-caps.
+ ++ ++
MFF Objectives (91
)
Simplification - +++ -/+
Additional flexibility - +++ +
Coherence and synergies - ++ ++
Focus on performance + + ++
To summarise the comparison of Options, the following observations can be made:
91
Comparison between new post-2020 MFF programme and PADR/EDIDP under the MFF 2014-2020.
37
 Option 1 relies on the obvious advantage of continuity with the Baseline situation
albeit with a higher budget. Being based on the PADR and on the architecture of the
EDIDP and with more funding it is expected to be more effective and deliver better
results compared to the Baseline scenario. However, the separation between research
and development can hamper achieving the full potential of coherence, synergies and
simplification. Also, a Fund running over a longer period may require higher degrees
of flexibility than short term programmes such as the PADR and the EDIDP and may
benefit from additional delivery mechanisms to achieve the Fund's objective in the
most optimal way. Therefore, compared to the other two Options, a lower efficiency
and effectiveness in achieving the Fund's objectives and the overarching MFF
objectives are expected.
 Option 2 builds on the strengths of the Baseline scenario and the higher funding
levels of Option 1 but maximises synergies and introduces simplification by
introducing one single and coherent Fund providing support for the full cycle of
research and development of defence capabilities covering activities from defence-
oriented basic research up to the end of the development process. It will thus
maximise the synergies between the two windows of the Fund. An additional
flexibility will be put in place, through measures such as the introduction of a wider
array of support instruments. The introduction, for the development phase, of support
mechanisms such as grants to consortia of buyers (e.g. PCP) allowing EU support to
reach industry through one single procedure (procurement) coordinated by Member
States/ associated countries could be an important measure of simplification too. The
introduction of lump sums can also provide a valuable contribution in reducing the
administrative burden for all actors involved, to facilitate enhanced cooperation
between them and increase the efficiency of the Fund compared to Option 1.
Therefore, compared to Option 1, Option 2 is expected to be more efficient and
effective in achieving the Fund's and the overarching MFF objectives.
 Option 3 incorporates many of the advantages of Option 2 compared to the Baseline
scenario and Option 1 but relies on a more prescriptive approach aimed at addressing
the identified problems in a more intrusive way with the aim to reach results faster.
However, while this approach may have a better focus on achieving results, it also
implies important risks, especially with regard to the uptake and thus to the capacity
of the Fund to achieve its objectives. The more so because the available data and
information as well as prior experience are extremely limited. Ultimately, being too
prescriptive without disposing of the necessary analytical tools and experience can
become counterproductive by discouraging participation by industry and Member
States/ associated countries and resulting in less projects applying for support. This is
a substantial risk also because the inputs from Stakeholders did not plead for such
measures. Because of the additional requirements, Option 3 may come with higher
administrative burden for stakeholders. Therefore, compared to the Baseline scenario
and Option 1 and 2, the expected positive impact on effectiveness coming from of the
more prescriptive approach under Option 3 is offset by the high risks involved and
higher burdens. The risks of an insufficient uptake in particular questions the
effectiveness of the Fund in providing sufficient support to collaborative projects
through the entire research and development cycle of defence oriented products and
38
technologies. As a consequence, Option 3 in inferior to Option 2 and cannot be
considered as the preferred option.
 However, even if Option 3 as a package when assessing the design of the Fund’s base
legal act implies too high risks, it may be worthwhile considering the potential
benefits of some of its individual elements at a later stage when implementing the
Fund as an intermediate approach between Options 2 and 3. When considered
appropriate and supported by the Programme Committee, individual elements of the
type examined under Option 3 could be taken into consideration in the definition of
the work programmes or when publishing calls for proposals.
4.2.1. Overall expected impacts of the chosen Option
The Fund under the preferred Option 2 is expected to boost the competitiveness and
innovation capacity of the European defence industrial base in the most optimal way, in
particular:
 Improved economic efficiencies in the defence industrial base and capturing size
effects by reducing duplications and enabling economies of scale (92
). This will
improve the competitiveness of the EU defence industry, resulting in reduced
dependence on non-EU sources for critical defence technologies.
 A more integrated European Defence Technology and Industrial Base ('EDTIB') by
reducing the barriers to cross-border collaboration and by reducing fragmentation of
demand and supply along national lines.
 Enhanced cross-border involvement of SMEs and mid-caps in the defence supply
chains and establishment of cross-border partnerships.
 Improved defence technology by enhancing the quality and the variety of
technologies being developed in the EU, enabling better use of limited budgetary
resources and stimulating the EDTIB to also develop technologies in fields that
currently lack sufficient investment.
 Enhanced Member States' collaboration in defence R&D projects by establishing a
framework for more efficient collaboration and by incentivising common technical
requirements.
 Benefit for the Member States as buyers through lower unit costs of equipment and
allowing them to develop and procure the modern defence equipment needed (93
) as
well as improving interoperability.
Wider economic effects would include positive macroeconomic effects, similar to those
of other categories of public spending, as regards effects on Gross Domestic Product
(GDP), tax and employment, but significantly higher as regards impacts on R&D(94
).
Beyond the macroeconomic effects on R&D, defence R&D is at the origin of important
spin-offs that benefit both the defence and the civil sector. A study on the economic
benefits of the Eurofighter Typhoon programme values its technological externalities at
92
See Section 2.2.2 for more detailed information on the importance of economies of scale and learning in the sector.
93
According to Middleton et al. (2006) a correlation can be established between past levels of defence R&D spending
and the quality of the defence equipment in the inventories of the corresponding country.
94 See for instance Europe Economics (2013).
39
USD 7.2 billion (minimum) (95
). Investments in defence R&D may also improve the
productivity of the economy by transferring resources to highly productive activities.
The initiative is also expected to have positive societal impacts. High skilled jobs in a
high tech intensive sector that are at risk due to the lack of new programmes may be
secured. Evidence from past collaborative projects suggests that an important number of
jobs across different Member States will be supported (96
). Such projects traditionally
require highly skilled engineering and technical staff and involve specialised skills that
have proved to be highly transferable towards a wide range of both defence and civil
activities (97
).
Finally, the initiative is expected to contribute to filling capability gaps in the EU and
improving the quality of the defence products and technologies available to the Member
States. Thereby standardisation will be fostered as well as interoperability of equipment.
This will enable significant savings, in support and maintenance, repair and overhaul
activities, and will facilitate joint operations.
4.3. Conclusions
This Impact Assessment highlights the need for an EU initiative aimed at supporting the
competitiveness and innovation capacity of the European defence industrial base that will
allow strengthening European strategic autonomy and reducing dependencies for key
defence competencies and capabilities. This is of key importance for the credibility of the
EU's foreign and defence policy. As explained, cooperation is an effective way to
achieve this, since it is likely that in the long run no single European country can afford
to maintain a full-spectrum defence industrial base and corresponding defence
capabilities on its own. The EU can make a substantive contribution to fostering defence
cooperation schemes and provide targeted incentives to support legal entities in
developing new defence products and technologies while bearing in mind the
specificities of the defence market where solely Member States as end-users create the
demand.
A globally competitive defence industry in Europe is not only crucial from a defence
perspective, it is also economically significant. European defence companies yield high
annual turnovers and are important employers of highly skilled individuals. Furthermore,
important synergies exist between the defence and civil sectors. Investing in the defence
sector produces positives externalities not only in terms of direct creation of high value-
added within the EU, but also indirect spill-over in other sectors. It will bring benefits to
the whole “eco-system” including notably SMEs and Research Institutions, as well as
prime contractors.
95
Hartley, 2008. Technological benefits included carbon fibre technology; super plastic forming and fusion bonding;
modular avionics; the flight control system; and aero-engine technology. Technology spin-offs were also identified
from the Typhoon Programme to civil aircraft, to motor car industries (including Formula 1 racing cars in Italy and the
UK) and to supply chains. For other examples see also Bellais (1999).
96
Hartley (2008), p. 9. See also more general estimations on employment effects of investments in the defence sector
in Oxford economics (2011) or Europe Economics (2013).
97
Hartley (2008).
40
Defence R&D forms the basis for Member States to foster an effective and credible
defence capability – and this is where the EU could play a key role to move away from
the status quo. Currently, defence-oriented research and development is primarily a
national affair where incentives to cooperate are lacking or inadequate. The Commission
should incentivize maturing technologies and mitigating risks upstream in the
development and implementation of programmes, while striving for inclusiveness and
promoting cross-borders partnerships within the EU.
To conclude, this Impact Assessment recommends Option 2 as the most optimal way for
implementing the Fund, with a view to:
 promoting the integration and strengthening of the global competitiveness of the
EDTIB;
 supporting the development of defence products and technologies in the EU by
acting as a catalyst for R&D cooperation programmes in Europe in key capability
areas; this should lead to follow-on collaborative defence investment programmes
aiming at answering Member States’ future capability needs and at strengthening
the development of future capabilities through increased cooperation;
 ensuring EU added value - the added value of a European approach lies with its
ability to coordinate a wide variety of stakeholders ranging from national
Ministries of Defence (as exclusive customers) to defence industries (as sole
providers of defence products) in order to achieve outputs to the benefit of all, yet
without substituting national efforts.
5. HOW WILL PERFORMANCE BE MONITORED AND EVALUATED?
5.1. Monitoring: implementation based indicators
To monitor the intervention and to allow for corrective action if necessary, a monitoring
system will be developed. Indicators based on existing sources of data/ implementation
reports will allow giving an indication of the fulfilment of the objectives. These
indicators are not politically sensitive or expensive to collect. Drawbacks are that they
can only give an indirect indication, some are long term indicators and it is difficult to set
a baseline and target value to achieve. A particularity with defence capability research
and development projects is the long lead times from idea, through research and
development, until there is a product on the market. It is not uncommon with ten or
fifteen years from research and / or development to procurement. This implies that the
long term effects of the Fund will not measurable within the time span of one
Multiannual Financial Framework.
5.1.1. Success indicators in the short term
In the short term, the implementation of the Fund is expected to tackle problem drivers
through two key elements:
• Make more funding available: The establishment of the Fund will make an
increased amount of funding available in the EU. This increasing funding should better
equip the EDTIB to better cope with the ever-increasing unit costs of product
41
development. Making more funding available will contribute to preserve existing
industrial, technological and defence capabilities and to potentially develop new ones.
• Incentivise cooperation: EU funding is expected to incentivise and be linked to
the condition of cross-border cooperation. This is expected to decrease fragmentation,
create economies of scale and create a further streamlining of R&D activities. As a result,
it will also lead to increased effectiveness and efficiency in the use of available funding
and thus, in the longer term, increase the innovative capacity of the EU defence industry
in as well as its competitiveness.
The short term success of the Fund will thus be measured in terms of increased number
and value of European defence research and development collaborative projects.
5.1.2. Success indicators in the medium and long term
In the medium and long run, the impact of the Fund is expected to strengthen the
competitiveness of the EU defence industry and to enhance the strategic defence
autonomy of Europe. Arguably, the most important aspect of this competitiveness is the
ability of the EDTIB to meet Europe’s defence needs, as well as the defence
requirements of Member States. Technological independence is a key component of
strategic autonomy. Therefore, the security of supply for critical defence equipment,
technology and defence material is considered essential. By ensuring the competitiveness
of the EU defence industry, the establishment of the Fund will contribute to the wider
security objectives of the EU.
The second aspect is the EDTIB’s competitiveness vis-á-vis global competitors. The
value of defence systems can only be interpreted in relative terms, i.e. as compared to the
performance of the equipment possessed by rivals. As a result, being able to keep ahead
of – or at least keep pace with – potential adversaries is essential for the armed forces.
The Fund is expected to strengthen the EDTIB’s ability to deliver such high-end
equipment for EU member states’ defence forces.
These impacts could be delivered through four core mechanisms.
• First, development of new defence technology through investment in a portfolio
of innovative R&D programmes;
• Second, greater harmonisation of requirements leading to greater commonality of
systems and increased interoperability between European nations thus increasing the
ability of European forces to fight effectively together;
• Third, maintaining and developing high-end industrial competences and
infrastructure that preserve European strategic autonomy in key defence capabilities
(including support, maintenance and upgrade of existing systems);
• Finally, creation of a more efficient defence enterprise across Europe that is better
able to target spending on battle-winning capabilities and strategic advantage over
adversaries.
42
The medium and longer term success will thus be measured by assessing European
technological superiority on the global market and the ability of the EDTIB to deliver
priority capabilities to European Armed Forces.
The Figure below outlines the problem drivers, the corresponding proposed indicators
and how they link to the overall general objective. A target value to achieve is not set yet
as no previous experience is available.
Figure 9: Monitoring indicators and the related objectives
Network indicators (98
) can be developed based on the implementation reports. The
network indicators are able to provide insights into the level of cooperation and a
measure of how it evolves over time. However, these indicators are not suitable for
monitoring. They are in particular relevant for the evaluation of the Fund when sufficient
data is available.
5.2. Additional indicators collected from applicants
These indicators are however not sufficient to provide a full picture of the different
objectives. Innovation indicators (99
) could also be useful. The level of research and
development is a measure of the innovative capability. In turn, innovative capability in
the field of defence where technological superiority is vital; is a driving force for a
98
Weighted degree or cluster coefficient to measure how cooperation in EDTIB evolves and the number of
relationships and level of cooperation.
99
Measuring the level of R&D in company collected from participating entities.
43
competitive EDTIB. For this reason the different calls could include a set of indicators
for the applicants to reply to along with their application. These indicators could be: a)
Turnover related defence / military activity b) Number of employees working on defence
/ military related matters c) Level of privately funded research and development
activities d) Level of publicly funded research and development activities. d) Number of
new cooperation opportunities as a result of previous Fund participation last 12 months.
This information would be cost effective to collect and provide important insights as it
would allow a comparison before and after participation to the Fund. However, the
company-level data would be sensitive and / or classified and needs to be treated
accordingly. The data at aggregated level only would be releasable as part of a public
evaluation report.
5.3. Additional indicators collected from the EDTIB
Implementation based indicators and additional indicators collected from applicants are
however not sufficient to establish a baseline for the EDTIB to compare with. To date
there is no reliable comparable data for the EDTIB. It is therefore appropriate to establish
a mechanism to acquire the necessary data. The collection of this data should cover a
representative sample of the EDTIB, not only from participating entities, allowing for
comparative analysis. This will allow for an indication of the impact of the Fund on the
EDTIB as a whole. As such it will cover the spin-off effects for the whole of EDTIB and
provide more information on its effects. This will help to better evaluate the Fund and
potentially offer more relevant policy options to improve the Fund over time. However, it
will be more expensive and EUROSTAT needs to be ready to help establish the data
gathering procedure. Potentially the indicators listed in chapter 5.2 could be collected
from the wider EDTIB as part of the Structural Business Statistics data or the
Community Innovation Survey.
Collecting this type of information from the EDTIB is sensitive as the data may be
considered as EU Classified Information. Companies cannot be obliged to reply and
might be reluctant to provide information.
5.4. Monitoring and Evaluation reports
Based on the monitoring scheme proposed above an annual performance review could be
foreseen where results will be progressively available. Monitoring information will
include in the early years information on input indicators (such as number and types of
projects); and depending of the length of the projects half way through the programming
period information on output indicators would become available; progressively followed
by information on results indicators (such as subsequent procurement by Member States
and patents) in the later years of the Fund.
An interim evaluation of the Fund will be performed once there is sufficient information
available about the implementation of the Fund and timing will be aligned with that of
the ex-post evaluations of the PADR and the EDIDP at the latest four years after the start
of the implementation.
44
The Commission will carry out a final evaluation is at the end of the implementation
period when the lion-share of projects will have been finalised.
45
ANNEX 1: PROCEDURAL INFORMATION
Lead DG(s), DEcide Planning/CWP references
The lead department for this evaluation was the Directorate-General for Internal Market,
Industry, Entrepreneurship and SMEs of the European Commission. In particular, the
evaluation has been carried out by Units I4 and I5 (Defence 1 and 2).
Organisation and timing
As per the Better Regulation Guidelines on impact assessments and ex-ante evaluations,
an inter-service steering group was set up to follow and steer the process. For this impact
assessment it included the following Commission’s departments: the Directorate-General
for Internal Market, Industry, Entrepreneurship and SMEs (lead service); Budget;
Communications Networks, Content and Technology, Competition; Economic and
Financial Affairs; European Political Strategy Centre; Eurostat; Migration and Home
Affairs; Mobility and transport; Research and Innovation; Secretariat-General; Legal
Service; Trade; as well as European External Action Service.
The inter-service steering group met for the first time on 7 February 2018 and was
involved – through three meetings and several written exchanges – in the process from
the drafting of the Staff Working Document.
Consultation of the Regulatory Scrutiny Board
An informal upstream meeting was held on 26 January 2018 with Regulatory Scrutiny
Board representatives where early feedback and advice was provided without prejudging
the subsequent formal deliberations of the Regulatory Scrutiny Board. On 11 April the
Regulatory Scrutiny Board issued a positive opinion on the Report.
The board recommended clarifying the legal base of the initiative and potential overlaps
with research funded in the other Horizon Europe specific programme, to adjust the
narrative on delivery mechanisms to allow for a more selective approach, and to better
justify the proposed direct management mode for the Fund. The impact assessment report
has been amended accordingly, in line with the board's recommendations.
Section 3.2.1 of the Impact Assessment has been fully updated in line with the first
recommendation. The wording of Section 2.4 has been improved and now clearly
explains the delineation between the European Defence Fund and the specific
Programme implementing Horizon Europe with regard to civil applications. To better
explain the delineation and strengths and weaknesses of the different options, the
wording across Section 4.1 has been adjusted and also the assessment of the Options in
Section 4.2, which now includes the possibility to implement, on a case-by-case basis
and where appropriate, some measures inspired by the logic of Option 3. Finally, specific
wording to justify the direct management mode is included in Section 4.1.1.
46
Evidence, sources and quality
The analysis presented in this document was based on several data sources, in particular:
various data sources, academic papers, consultations with Member States and
Stakeholders (see bibliography below and Annex 2). It builds on the ex-ante evaluation
(100
) prepared in June 2017 for the proposal of the EDIDP, supported by an external
study, which analysed existing data and literature.
It is important to point that one of important risks concerning any evaluation to be carried
out with regards to the defence sector is the lack of publicly available statistical data on
this industry. In particular, Eurostat does not have separate statistics on defence or the
defence industry (civil and military use are not separated), whereas data from Member
States is often classified.
Work on this Impact Assessment was predominantly carried out in-house. As far as the
academic papers and other publications used for the Impact Assessment are concerned,
these are provided in the bibliography (overleaf).
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Official Journal of the European Union, L 328, 12 December 2017.
Oudot, J., ‘Stratégies et performances des entreprises de défense à l’international’,
L’Observatoire Économique de la Défense, ECOeDEF issue 90, March 2017.
Oxford Economics, Economic case for investing in the UK defence industry: A report for
ASD and the Defence Industries Council, Oxford, 2011.
Pugh, P., Source book of defence equipment costs, P. G. Pugh, Bedford, 2009.
Pugh, P., The cost of seapower, Conway Maritime Press, London, 1986.
Pugh, P., 'The procurement nexus', Defence Economics, Vol. 4, No. 2, Taylor & Francis,
London, 1993, pp. 179-194.
Setter, O. and Tishler, A., 'Theory and application to the US military', Defence and Peace
Economics, 18:2, 2006, pp. 133 – 155.
Special Eurobarometer 461, Public Opinion on defence in the EU, 2017 [Accessed at
http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/ResultDoc/download/Docu
mentKy/78720 on 20 March 2018]
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http://www.consilium.europa.eu/en/press/press-releases/2017/03/25/rome-declaration/ on
20 March 2018]
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Unites States Government Accountability Office (US GAO), ‘Defense Acquisitions:
Assessments of Selected Weapon Programs’, 2017
ANNEX 2: STAKEHOLDER CONSULTATION
This annex is the synopsis report of stakeholder consultation activities carried out to
prepare the proposal for a Regulation of the European Defence Fund 2021-2027 to seek
stakeholders' views on the goal, structure and implementing modalities of the Fund.
The stakeholder consultation built upon the views already obtained when setting up two
limited testing programmes under the 2014-2020 EU budgetary period; namely the
Preparatory Action on Defence Research (PADR) launched in April 2017 and the
Commission proposal for a regulation for a European Defence Industrial Development
Programme (EDIDP) adopted in June 2017.
Identification of stakeholders
The identified stakeholders cover those that are directly affected by the Fund and have a
high level of awareness of the initiative, such as Member States, Industry and Research
Institutions. It also covers stakeholders that may have an opinion on the subject, e.g.
citizens and certain Non-governmental Organisations with strong views and committed
to the subject.
Consultation methods
To seek external advice in the short and longer terms on defence research policy
Commissioner Bienkowska convened a group of sixteen high-level persons active in the
area of defence; including industry, research organisations, European/ national
parliaments, and policy-focussed institutes. Following regular conversations and
consultations this 'Group of Personalities' published a report on "European Defence
Research - the case for an EU-funded R&T programme" (Group of Personalities Report)
in January 2016.
To give all stakeholders the possibility to comment, the Commission initiated an Open
Public Consultation on the European Defence Fund, as part of a larger consultation
exercise on all policy areas covered by the EU's long-term budget for 2021-2027. The
Open Public Consultation ran from 13 January 2018 to 9 March 2018. The questionnaire
was accessible in 23 EU languages.
Through the Open Public Consultation web portal also five Position Papers have been
received by Non-governmental Organisations and Research Institutions.
In addition to the Open Public Consultation, the Commission received position papers
from the industrial organisations and some Member States.
Analysis of feedback from the Open Public Consultation
The response rate to the consultation on the Fund (101
) was low: 48 replied have been
received from private enterprises, business associations, Non-governmental
101
European Commission Public Consultation (2018).
Organisations, public authorities, research and academia and a religious community (see
figure below). A likely reason for the low uptake could be that, being part of a general
consultation exercise where a set of standardised questions has been asked focussing on
past experience, the questions were only applicable to a limited extent to the Fund (102
).
Also for this reason five respondents have submitted position papers allowing them
provide their views and opinions.
The Consultation asked questions on the importance of the policy challenges, conceived
EU-added value, and experience with current funding possibilities under the European
Defence Fund.
A large majority of respondents (84%) considers that the policy challenge that the Fund
aims to address is rather to very important. Only 2% of respondents are of the view that
this is not an important challenge. When asked to what extent the programmes adds
value, compared to what Member States could achieve at national, regional and/or local
levels; 92% considered the programme adds value: with 37.5 % believing that it adds
value to some extent; 42% to a fairly large extent and 12.5% to a large extent. Only 2%
found that it does not at all add value.
The Table below shows which obstacles respondents considered to a lesser or large
extent to hamper the achievement of objectives of the fund under the 2014-2020 MFF.
Although it is difficult to draw conclusions from the below given the limited number of
replies and limited the operational experience with the Fund, some observations can be
made: administrative burden and the difficulty to ensure sustainability after the funding
period are considered as the most burdensome obstacles by respondents. On the contrary,
respondents were less concerned about possible insufficient use of financial instruments,
insufficient stakeholder involvement, or administrative capacity to manage the projects.
102
Most questions asked about the respondents experience with programmes under the current EU budgetary period
2014-2020. It should be kept in mind that the European Defence Fund has been only operational to a very limited
extent at the moment of the Open Public Consultation.
0
5
10
15
20
Private
enterprise
Business
association
NGO public
authority
Research/
academia
religious
community
Other/ no
answer
Type of respondent (n=48)
Obstacle Large
extent
Fairly
large
extent
Some
extent
Not at all Total no
respondents
High administrative
burden and delays
10 26 7 1 44
Lack of critical mass 11 15 11 6 43
Insufficient
administrative capacity
to manage
6 15 14 5 40
Lack of flexibility 8 23 9 3 43
Difficulty of combining
EU action with other
public interventions
12 13 16 3 44
Insufficient focus on
performance
6 15 8 9 38
Difficultly to ensure
sustainability of
projects
17 12 6 5 40
Insufficient use
financial instruments
3 13 11 8 35
Insufficient
involvement
stakeholders
10 12 13 7 42
Analyses of feedback from position papers and consultations
A first broad distinction can be made between those Stakeholders that do not support the
objectives of the initiative and those that do support it:
Stakeholders not supporting the objectives of the Fund:
The Stakeholders that oppose the initiative or are very critical to it mainly put forward
arguments of an ethical nature. According to a Non-governmental Organisation the Fund
is not a good instrument to preserve jobs and growth, as it diverts resources from the civil
research to the military industry leading to 'crowding out effects' whilst the civil sector
contributes more to growth and jobs. This contributor also argued that the Fund will not
strengthen the European military industry, as nothing is done to overcome Member
States' tendencies to serve short-term national industrial interests and as the meaning of
European strategic autonomy is not defined and no requirements are set to resolve
duplication of weapon systems. The contributor concluded that military solutions are not
the best to support a global peaceful economic growth. Money should be rather spent to
address the security challenges in a peaceful and sustainable manner; for example
through humanitarian aid programmes. Another contributor underlined that the EU
should focus on long-standing human security and sustainable peace and not on the
business interests of the defence industry. It also called to ban ethically problematic
technologies from funding and to establish an advisory body to elaborate ethical and
legal guidelines.
Stakeholders supporting the objectives of the Fund
The Group of Stakeholders with a high awareness of the Fund expressed their support for
the initiative. This Group covers Research Institutions, Member States and defence
companies and business associations. Inputs received from these Stakeholders focussed
on (I) the type of activities that the Fund should finance and on (II) the structure of the
Fund and delivery mechanisms.
(I) Topics to be financed
A Research Institute argued that Defence Research should combine a top-down approach
(capability pull) with a bottom-up approach (technology push), as the latter provides
insights and guidance to decision-makers on most relevant technologies and challenging
that determine strategic autonomy and technological leadership. European research and
innovation activities on critical defence technologies should be intensified to ensure own
up-to-date applications and the EU’s strategic autonomy. The Institute identified seven
grand defence-technology challenges for Europe post-2020 and proposed research topics
within these challenges: artificial intelligence and autonomy; digital battlefield; quantum
technologies for defence applications; advanced radar technologies; power supply and
efficiency; next-generation effectors; human performance enhancement. Another
Research Institute underlined that there should be a balance between short-term goals and
long/mid-terms research priorities to improve competitiveness. In its view it is important
to support new technologies and advanced concepts (emerging, disruptive, or coming
from other sectors) that can have a major impact on future defence capabilities and those
that provide solutions for interoperability and common standards. Also input from other
research organisations argued to reinforce the inclusion of lower RTL research to enable
disruptive results. An industrial association identified four top level capability areas in
which investments are needed: Gaining Information Superiority: Enabling Expeditionary
Operations: Protecting EU Territory: Maritime Mobility and Operational Capability at
Sea. To support such top-level capability areas, the Fund could fund research and
development projects in Mission oriented projects, Capability development projects,
Critical technologies, and disruptive technologies. A research association welcomed the
Fund as an important step towards intensified defence cooperation. Harmonisation and
synchronization of capability development projects are necessary for the effectiveness of
the fund. It recommended setting up a “European Requirements and Synchronisation
Evaluation Office or board”. As the most important technical and cooperation decisions
of a major capability development project are taken in the early stages and as they are
also the least costly phase of capability development, it recommended focussing the
funding on the first phase of each project. This would allow supporting more projects and
a higher contribution percentage.
(II) Structure of the Fund and funding modalities
An industry organisation argued for a holistic capability-driven approach to the whole
technology cycle, based on integrated planning for both research and development. It
recommended establishing the Fund separately from the Framework Programme for
Research and Innovation, on the basis of a single regulation covering both the research
and the capability window. The Fund should align as much as possible the modalities of
the two windows, but also taking into account the differences between research and
development actions.
On Rules of Participation, a research organisation put forward that the Fund's rules of
participation should build as much as possible on those for the EU civil programmes and
only differentiate where necessary. As regards third country participation: It commented
that that rules should be set avoiding dissemination of knowledge beyond EU member
States.
On IPR rules, Stakeholders were also united in their views that IPR models need to be
adapted for defence. Research Institutes asked for a specific attention to IPR rules, which
should preserve the right of all participants in the project and not only large industry.
All inputs received on the funding rates shared the view that funding rates need to take
into account the specifics of the sector. As regards the research window 100% EU
financial contribution is necessary according to one research organisation. Different
research institutes argued that the cost of infrastructures needs to be covered. The Group
of Personalities Report advised that the rules of participation of Horizon 2020 needed to
be adjusted to address defence specificities. In particular, they argued that a percentage
higher than 25% to cover indirect costs should be allowed. An industrial association
commented that the funding rates cover in reality only around 50% of the real industrial
costs, which contrary to the civil sector, is not appropriate for defence as there is one
customer who determines the requirements, timetables and export markets. Defence
companies cannot risk investing in R&T activities for a product that may never be
acquired by the customer or exported.
On simplification and flexibility: Several inputs called for a simple, but flexible
approach: A research institute plead for one simple cost method. An industrial
association argued that "the Golden Rules of successful cooperative programmes must be
followed: lean processes, single-point leadership, a strong participation and commitment
from Member States to the acquisition road, and a single set of specifications". The
Group of Personalities Report found that options for co-funding by Member States
should be considered e.g. through models like PCP.
ANNEX 3: EXAMPLE ILLUSTRATING FRAGMENTATION IN THE EU DEFENCE INDUSTRY
As mentioned in Section 2.2.2, one relevant illustration of the fragmentation and the
resulting impact on the competitiveness of the industry can be found in relation to
combat aircraft. The Table below provides a comparison between the R&D costs and the
expected sales of the three European aircrafts (Eurofighter Typhoon, the Rafale and the
Gripen) and the US-led Joint Strike Fighter F-35 programme. It is mainly based on
figures provided in the 2013 study on the costs of non-Europe in the defence field (103
)
with the addition of recent data on the Joint Strike Fighter F-35 programme because of
the magnitude of the difference in the corresponding figures.
Table: Comparison between the European aircraft projects and the US-led Joint Strike
Fighter (104
)
The Table clearly illustrates the difference in the size of the expected production output
between the three European Programmes and the Joint Strike Fighter F-35 Programme.
One can note that even with the most recent figures on the Joint Strike Fighter F-35
Programme (105
), which show lower expected sales and more importantly substantially
higher R&D costs, the level of R&D costs per unit remains comparable to those of the
European aircraft because the scale of production is still greatly superior (106
). To provide
a simple illustration of the consequences of fragmentation, the last three columns were
added to the table showing the difference in the amount of R&D costs per unit that could
have resulted if only one EU project has been realised with sales equivalent to those
achieved by the existing three.
103
Briani (2013a).
104
The Eurofighter Typhoon Programme is a programme performed in cooperation by four EU Member States (UK,
DE, IT and ES). The Joint Strike Fighter F-35 is a US-led Programme performed in collaboration with partner nations
that include four EU Member States (UK, IT, NE, DK). The remaining two programmes are national ones (they would
thus not be affected by possible additional costs of cooperation as described in Section 2.1.3).
105
Unites States Government Accountability Office (US GAO) 2017, p. 165.
106
It is important to note that looking only at the data on costs does not provide information on the differences in the
performance of the different aircrafts. The Joint Strike Fighter F-35 is for instance a more recent project integrating
very advanced technologies. The objective here is not to provide a comprehensive assessment of the different
programs, but to only demonstrate the effects of fragmentation and scale.
R&D Costs
(mEUR)
Units envisaged
/produced
R&D costs per unit
(mEUR)
R&D costs per unit
if single EU project
(mEUR)
Change in R&D
cost per unit
if single EU project
(%)
Eurofighter 19.480 707 28 16 -41%
Gripen 1.480 204 7 1 -83%
Rafale 8.610 294 29 7 -76%
Total European
Programmes
29.570 1.205 25
JSF F-35 (US-led) 19.340 3.003 6
JSF F-35 (US-led) 63.839 2.457 26
Data source Briani (2013) for columns 1 to 3; columns 4 to 6 - own calculations on the basis of the data from Briani (2013)
Data source US GAO (2017) for columns 1 to 3; column 4 - own calculations on the basis of the data from US GAO (2017)