Explanatory Memorandum to COM(2023)237 - Establishing the Act in Support of Ammunition Production

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dossier COM(2023)237 - Establishing the Act in Support of Ammunition Production.
source COM(2023)237 EN
date 03-05-2023


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Russia’s military aggression against Ukraine has marked the dramatic return of territorial conflict and high-intensity warfare on European soil. European Union Member States’ armed forces have been tailored during the last decades to perform expeditionary, peace-keeping and/or peace enforcement missions, and the planning and procurement of defence systems has been tailored according to this operational reality.

The production capacity of the European Defence Technological and Industrial Base (EDTIB) has been therefore tailored to respond primarily to limited Member States’ needs, mostly along national dividing lines, due to decades of public underinvestment.

In such a scenario, defence companies often faced the need to reduce production rates in order to keep production lines afloat and maintain skilled personnel, while producing limited quantity of defence systems for national customers.

The return of a high intensity conflict scenario reverses the market context described above. As pointed out by the Joint Communication on Defence Investment Gaps analysis and way forward (JOIN/2022/24 final) underinvestment resulted into both capability and industrial gaps within the Union. In July 2022 the Commission presented the proposal of European Defence Industrial Reinforcement through common Procurement Act (EDIRPA), aimed at supporting collaboration between Member States in the procurement phase to fill the most urgent and critical gaps, especially those created by the response to the current Russia’s aggression, in a collaborative way. EDIRPA will contribute to reinforce common defence procurement and, through the associated Union financing, to strengthen EU defence industrial capabilities and the adaptation of Union’s defence industry to structural market changes resulting increased demand due to the return of high intensity warfare.

Capability gaps are various, but in light of the situation in Ukraine, there is a specific pressing need for ground-to-ground ammunition and artillery ammunition, as well as missiles as recognised by the Council who agreed on 20 March 2023 on a three-track approach. The Council agreed to urgently deliver ground-to-ground and artillery ammunition to Ukraine and, if requested, missiles and called on Member States to jointly procure ammunition and if requested missiles, to refill their stocks while enabling the continuation of support to Ukraine. As joint efforts to enable Member States to replenish their depleted stocks and to support Ukraine can only be effective if the EU supply side can deliver on time the required defence products, the Council tasked the Commission to present concrete proposals to urgently support the ramp-up of manufacturing capacities of the European defence industry, secure supply chains, facilitate efficient procurement procedures, address shortfalls in production capacities and promote investments, including, where appropriate, mobilising the Union budget.

The Defence Joint Procurement Task Force has initiated the mapping of the EU industry’s manufacturing capacities, including in the area of ground-to-ground and artillery ammunition, as well as missiles (‘relevant defence products’). However, production capacities within the Union’s defence industry sector have been tailored for peace time while European defence companies face a surge in demand in the area of relevant defence products, requiring them to produce more and faster. This discrepancy between an urgent armed forces’ need and existing limited production capacity results into price inflation and a difficulty to serve customers, and risks generating a security of supply issue for Member States’ Armed Forces and therefore, potentially harming the security of EU citizens. This does not only apply to prime contractors but also across the whole supply chain, which is, for relevant defence products, widely spread throughout the Union and composed of several SMEs and Mid-Caps.

While Member States need to ensure firm orders to the EDTIB, defence industrial ramp up is a process requiring time and efforts in several areas (human resources, machine tools, supply chain management, securisation of raw materials). While firm orders from Member States are a precondition for any investment by industry, the Commission can intervene by de-risking industrial investments via grants and loans allowing a faster adaptation to ongoing structural market change and removing existing bottlenecks, allowing industry to produce more and faster along the value chain.

On top of industrial reinforcement, additional measures are needed to ensure the correct functioning of the internal market in the relevant defence products areas, in line with provisions of article 114 TFEU. Firm orders by Member States authorities will face as an obstacle the existing limited manufacturing capacity, raw materials, skilled personnel. To ensure the increased volume and speed of production, the Commission may need the possibility, in agreement with the Member States concerned, to invite legal entities to accept and prioritise orders for the production or supply of the relevant defence products. This will ensure that limited existing production capacities are used for the benefit of political goals set by the Council. Along the same lines, regulatory simplification will allow to temporarily derogate from existing regulations and directive with the objective to speed up production. The Act foresees in particular a derogation from Directive 2009/81/EC of the European Parliament and the Council 1 , to allow the possibility to open up national framework contracts to other Member States without organising a new tender in view of the extreme urgency of the situation and where the flexibilities offered by Directive 2009/81/EC of the European Parliament and the Council are not sufficient to ensure the security interests of Member States willing to engage in common procurement. This derogation shall be accompanied by the possibility for any economic operator that meets the initial requirements of the framework agreements to join the framework agreement. The framework agreement shall remain subject to the principles of transparency and non-discrimination.

Similarly, and in order to speed up intra-EU transfers of ammunition and missiles, they shall be allowed to derogate from article 4(1) of Directive 2009/43/EC and not be subject to prior authorisation.

In order to be competitive, innovative and resilient, as well as to be able to ramp up its production capacities, the EDTIB needs to access both public and private financing. Facing important financial needs to increase production capacities, defence companies might need, on top of grants, debt solutions to bridge gaps between Ministries of defence orders and cash-flow need. However, restrictive lending policies towards the defence industry sector hampers access to finance for defence companies in the EU.

Undertakings in the value chain of relevant defence products shall have access to debt financing, to speed-up investments needed to increase manufacturing capacities. The instrument will aim at facilitating access to finance for Union’s companies in the ammunition and missile field. The Regulation should notably ensure that those legal entities are granted the same conditions offered to other legal entities, taking charge of any additional cost arising specifically for the defence The Act foresees measures to facilitate access to finance, both with a specific eligible action, as well as under a Facility, the ‘Ramp-up Fund’ proposing solutions, to leverage, de-risk and speed-up investments needed to increase manufacturing capacities. The Ramp-up Fund shall be implemented in direct or indirect management in accordance with the Financial Regulation. The Commission will explore the possibility to establish a blending facility, including under InvestEU Fund established by Regulation (EU) 2021/523 of the European Parliament and Council, in close cooperation with its implementing partners. Administrative applications related to the planning, construction and operation of production facilities, intra-EU transfer of inputs as well as qualification and certification of end products should also be treated in the fastest legally possible way.

• Consistency with existing policy provisions in the policy area

The Council of the European Union, on 20 March 2023 agreed on a three-track approach to “speed up the delivery and joint procurement, aiming at one million rounds of artillery ammunition for Ukraine in a joint effort within the next twelve months”. It also called “Member States to jointly procure 155mm ammunition and, if requested, missiles for Ukraine in the fastest way possible before 30 September 2023 from the European defence industry (and Norway) within the parameters defined in the context of an existing EDA project or through complementary joint acquisition projects led by a Member State”. Finally, it invited the Commission to “present concrete proposals to urgently support the ramp-up of manufacturing capacities of the European defence industry, secure supply chains, facilitate efficient procurement procedures, address shortfalls in production capacities and promote investments, including, where appropriate, mobilising the Union budget.

The Council also stated that “regular meetings at the level of the National Armament Directors with the Defence Joint Procurement Task Force (Commission, EEAS, EDA) will also be organised, to assess the needs and the industrial capabilities as well as to ensure the necessary close coordination, especially regarding the provision from stocks, the reprioritisation of existing orders and the different joint acquisition projects, to ensure an adequate implementation of the three different tracks”.

On 23 March 2023 the European Council reaffirmed that the “European Union stands firmly and fully with Ukraine and will continue to provide strong political, economic, military, financial and humanitarian support to Ukraine and its people for as long as it takes”. The European Council welcomed the “agreement in the Council to urgently deliver ground-to-ground and artillery ammunition to Ukraine and, if requested, missiles, including through joint procurement and the mobilisation of appropriate funding including through the European Peace Facility, aiming at providing 1 million rounds of artillery ammunition in a joint effort within the next twelve months”.

The Act in Support of Ammunition Production will also be complementary to the proposed European Defence Industry Reinforcement through common Procurement Act (EDIRPA) and will pave the way for the future European Defence Investment Programme (EDIP).

EDIRPA incentivises cooperation in the procurement phase, benefitting Member States commonly procuring the most urgent and critical defence items, offering therefore increased visibility to defence manufacturers to help them adapt to structural changes. The current supply crisis in the field of ammunition requires additional action targeting the supply side for relevant defence products. The Act in Support of Ammunition Production will therefore accompany, incentivise, speed up and simplify the needed ramp up for relevant defence products.

• Consistency with other Union policies

The Instrument will complement existing collaborative EU defence initiatives. It will generate synergies with the implementation of the Strategic Compass for Security and Defence, and other EU programmes, such as the European Defence Fund. The Instrument will also be implemented in full consistency with the EU capability development plan (CDP) identifying the defence capability priorities at EU level, as well as with the EU coordinated annual review on defence (CARD), which inter alia identifies new opportunities for defence cooperation. In this context, account may also be taken of relevant activities carried out by the North Atlantic Treaty Organisation (NATO) and other partners where they serve the Union's security and defence interests and do not exclude any Member State from participating.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

This Regulation aims at strengthening the responsiveness and ability of the EDTIB to ensure the timely availability and supply of relevant defence products in the Union. To this end, the regulation lays down a framework for implementing a series of specific and targeted measures to speed up the industry adjustment to structural changes. This framework is based on 2 pillars, each corresponding to one of the legal bases of this Regulation.

·The first pillar is composed of measures to support the industrial reinforcement throughout the supply chains related to the production of relevant defence products in the EU and is based on Article 173(3) of the Treaty on the Functionning of the EU (TFEU).

The Union’s defence industry involved in the production of relevant defence products is currently facing a sudden surge of demand and urgently needs to adapt to this new market situation. The EU financial support under this pillar will aim at reinforcing the competitiveness and resilience of the European Defence Technological and Industrial Base (EDTIB) in the field of relevant defence products, to allow its urgent adaptation to structural change in accordance with the first indent of Article 173(1) of the TFEU. Thereby, this pillar supports EU industry to increase its volume of production, reduce its delivery lead-time and address potential bottlenecks and/or factors that could delay or impede the supply and production of relevant defence products.

·In line with Article 173(3) of the TFEU, this pillar excludes any harmonisation of the laws and regulation of the Member States. The second pillar is composed of harmonisation measures to identify, map and continuously monitor the availability of the relevant defence products, their components and the corresponding inputs, and measures to establish requirements to secure the timely and lasting availability of the relevant defence products in the Union and is based on Article 114 TFEU.

Ensuring the security of the territory of the Union constitutes an overriding public policy objective and this security depends also on the availability of defence goods and services in sufficient quantities. The current geopolitical context results into a significant increase of the demand for relevant defence products in the Union. This situation affects the functioning of internal market for these products and of their components and threatens their security of supply. Member States have taken measures or are likely to take measures to preserve their own stocks of these products and of their components as a matter of national defence. However, divergent national legislation, in particular regarding the certification of defence products, intra-EU transfer of products and related components as well as divergent implementation of Union law have proven to become bottlenecks for European relevant defence products supply chains and obstacles to interoperability. As a result, it is necessary to adopt Union-harmonising legislation based on Article 114 of the TFEU to ensuring the functioning of the internal market, by avoiding shortages of relevant defence products in the Union. These measures should consist in the identification of ‘supply-critical defence products’, the mapping of related industrial capacities, priority rated orders, acceleration of grant-permitting procedures or facilitation of procurement procedures. The combination of these measures should have the result of making available an increased offer in relevant defence products and of their components in all Member States which are needed for the functioning of the internal market and should also converge to ensure the timely availability and supply of relevant defence products in the Union.

Other articles of the TFEU or each article on its own cannot justify both of the above objectives. The proposed elements are provided in one act, as all the measures constitute a coherent approach to address, in different ways, the need for strengthening of the Union’s defence ecosystem.

• Subsidiarity (for non-exclusive competence)

Providing a comprehensive response to the sudden increase of relevant defence products demand requires a rapid and coordinated action at European level as no single Member State is capable of achieving this alone. Member States individually cannot effectively address the risk of significant supply disruptions of such defence products which are due to a disequilibrium of the offer and the demand in the Internal market. Uncoordinated approaches would entail the risk of worsening the effect of the supply crisis by encouraging price-spiralling and crowding-out effects for these defence products. Moreover, considering the existing production capacities of relevant defence products in the Union, the consequences of the Union’s supply shortages are so far-reaching that intervention at the level of the Union is best placed to address such issues.

Therefore, Union action is needed in relation to the areas that this proposal addresses through its 2 pillars.

·With regard to the first pillar, the measures proposed aim at accelerating investments in relevant defence products manufacturing capacities in the Union, while encouraging the EDTIB’s resilience through cross-border industrial partnerships and collaboration of relevant companies in a joint industry effort to avoid worsening fragmentation of the supply chains. Financial support and incentives can only be adequately designed and implemented at Union level given the need to adjust the EDTIB to structural changes. It is important to underline that defence producers of relevant defence products are widely spread throughout the Union and composed by several SMEs and Mid-Caps.

·Regarding the second pillar, the measures foreseen under it, will serve the internal market, strengthen the resilience of the EDTIB, and guarantee security of supply. The measures aimed at identifying, mapping and continuously monitoring the availability of the relevant defence products, their components and the corresponding inputs in the Union, will ensure the necessary intelligence gathering at Union Level and enable the Commission and Member States to anticipate shortages affecting the security of supply of such defence products. The measures aimed at establishing requirements to secure the timely and lasting availability of the relevant defence products, will enable Member States and Commission to address the shortages and bottlenecks in the supply chains in a more effective way than through a patchwork of national measures.

• Proportionality

In view of the unprecedented geopolitical situation and the significant threat for security of the Union, there is a clear need for a coordinated action at EU level. The proposed policy approach is proportionate to the scale and gravity of the problems that have been identified i.e., need to ensure the timely delivery of some of the defence products that are urgently needed by Member States. The measures set out in the proposal do not go beyond what is necessary to achieve their objectives, are proportionate to those objectives and respect the limits of possible Union intervention under the Treaties. They will need to be implemented in accordance with the principle of proportionality, including, in the context of limitation to fundamental rights in accordance with Article 52(1) of the Charter of fundamental rights.

• Choice of the instrument

The Commission proposes a Regulation of the European Parliament and of the Council. This is the most suitable legal instrument as only a Regulation, with its directly applicable legal provisions, can provide the necessary degree of uniformity needed for the establishment and operation of a Union Instrument aiming at promoting the reinforcement of an industrial sector across Europe and ensuring security of supply of specific products. A directly applicable Regulation also allows to ensure that the proposed measures can be implemented at short term to address the needs which are outlined in the proposal.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks of existing legislation

There is no prior existing legislation covering or pertaining to this specific action. To date, there was no other Union legislative initiatives in the area of defence to support the ramp up of production capacities, reduce delivery lead times and tackle supply shortages. Therefore, there is no previous ex-post evaluation or fitness check of existing legislation that took place for this legislative initiative.

• Stakeholder consultations

Due to the politically sensitive nature of the proposal and urgency to prepare the proposal so that it can be adopted on time by the co-legislators, a stakeholder consultation could not be carried out.

• Impact assessment

Due to the urgency to increase production capacities of relevant defence products and ensure their security of supply, this proposal is not accompanied by a formal impact assessment. Such document could not have been delivered in the timeframe available prior to the adoption of the proposal. The proposal draws on the lessons learned from the Joint Communication on the Defence investment gaps analysis and way forward of 18 May 2022 and builds on the work undertaken in the framework of the Defence Joint Procurement Task Force, established immediately after the publication of the above- mentioned Joint Communication. The Commission tables this proposal for a Regulation without including an impact assessment, in order to allow its swift implementation no later than 26 April 2023. The proposal is limited in time and contains a provision requiring the Commission to draw up a report on the implementation of this Regulation.

• Regulatory fitness and simplification

The Instrument is not expected to increase the administrative burden.

• Fundamental rights

Ensuring the security of EU citizens is an objective of general interest which can contribute to safeguarding their fundamental rights to life in accordance to Article 2 of the Charter of Fundamental Rights of the European Union (‘the Charter’) and to liberty and security in accordance with Article 6 of the Charter.

On the other hand, Article 16 of the Charter provides for the freedom to conduct a business and Article 17 of the Charter on the right of property.

Some measures under pillar 2 are needed to address serious disruptions affecting the relevant defence products supply in the Union and may temporarily limit the freedom to conduct a business and the freedom of contract, protected by Article 16 and the right to property, protected by Article 17 of the Charter. Any limitation of those rights in this proposal will, in accordance with Article 52(1) of the Charter, be provided for by law, respect the essence of those rights and freedoms, genuinely meet objective of public interest of security and will comply with the principle of proportionality.

The obligation to disclose specific information to the Commission, provided that certain conditions are met, respects the essence of and will not disproportionately affect the freedom to conduct a business (Article 16 of the Charter). Any information request serves the objective of general interest of the Union to enable the identification of potential mitigation measures to shortages affecting relevant defence products which are essential to ensure the security of the Union and its member States. These information requests are appropriate and effective to attain the objective by providing information necessary to assess the crisis at hand. The Commission in principle only requests the desired information from representative organisations and may issue requests to individual undertakings only if it is necessary in addition. Since information on the supply situation is not available otherwise, there is not any equally effective measure to attain the information necessary to enable European decision-makers to take mitigation action. In light of the serious geopolitical and security consequences of relevant defence products shortages and the respective importance of mitigation measures, information requests are proportionate to the desired aim. Furthermore, the limitation to the freedom to conduct a business and the right to property are offset by appropriate safeguards. Any request to information may only be launched for products necessary to the production of relevant defence products and specifically identified, by the Commission and through an implementing act, as affected by a supply crisis.

The obligation to accept and prioritise priority rated orders respects the essence of and will not disproportionately affect the freedom to conduct a business and the freedom of contract (Article 16 of the Charter) and the right to property (Article 17 of the Charter). This obligation serves the objective of general interest of the Union of security by addressing the relevant defence products supply disruptions. The obligation is appropriate and effective to attain this objective by ensuring the available resources are preferentially utilised for production of such relevant defence products. There is no equally effective measure. When it comes to products identified as affected by a supply crisis which threatens the above-mentioned objectives of general interest and fundamental right, it is proportionate to oblige undertakings contracted in the context of a joint procurement of Member States or undertakings which are involved in the supply chain of the latter to accept and prioritise certain orders. Appropriate safeguards ensure that any negative impact of the prioritisation obligation on the freedom to conduct a business, the freedom of contract and the right to property does not amount to a violation of these rights. Any obligation to prioritise certain orders may only be launched for products identified by the Commission and through an implementing act as affected by a supply crisis. The undertaking concerned may request the Commission to review the priority rated order if it is unable to perform the order or performing the order would place unreasonable economic burden on them and entail particular hardship. Furthermore, the subject of the obligation is exempt from any liability for damages for the violation of contractual obligations resulting from compliance with the obligation. Finally, this Regulation will only be applicable for a limited period of time needed to re-establish the functioning of the internal market and the adjustment of industry to structural changes.

4. BUDGETARY IMPLICATIONS

The financial envelope for the implementation of the Regulation for the period from the date of its entry into force to 30 June 2025 shall be EUR 500 million in current prices.

The impact on the multi-annual financial framework period in terms of required budget and human resources is detailed in the legislative financial statement annexed to the proposal and will be met from the available resources of the Multiannual Financial Framework 2021-2027.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The Commission should draw up an evaluation report for the Instrument and communicate it to the European Parliament and to the Council no later than 30/6/2024. This report will notably assess the progress made towards the achievement of the objectives set in the proposal. Also, taking into account the evaluation report, the Commission may submit proposals for any appropriate amendments to this Regulation, notably in view to continue addressing any persisting risks in relation to the supply of the relevant defence products.