In its Communication of 30 November 2016 on a European Defence Action Plan, the Commission committed itself to complementing, leveraging and consolidating collaborative efforts by Member States in developing defence capabilities to respond to security challenges, as well as to fostering a competitive, innovative and efficient defence industry throughout the Union. It proposed, in particular, to launch a European Defence Fund (the ‘Fund’) to support investment in joint research and in the joint development of defence equipment and technologies, thereby encouraging joint procurement and joint maintenance of defence equipment and technologies. The Fund would not replace national efforts in this regard and should act as an incentive for Member States to cooperate and invest more in defence. The Fund would support cooperation during the whole cycle of defence product and technology development, thereby fostering synergies and cost effectiveness. The objective would be to deliver capabilities, ensure a competitive and innovative basis for the defence industry across the Union, including by cross-border cooperation and participation of small and medium-sized enterprises (SMEs), and to contribute to greater European defence cooperation.
(2)
In order to foster the competitiveness, efficiency and innovation capacity of the Union's defence industry, which contributes to the Union's strategic autonomy, a European Defence Industrial Development Programme (the ‘Programme’) should be established. The Programme should aim to enhance the competitiveness of the Union's defence industry, contributing to the improvement of defence capabilities, inter alia, in relation to cyber defence, by supporting cooperation between undertakings throughout the Union, including SMEs and middle capitalisation companies (mid-caps), research centres and universities, and collaboration between Member States, in the development phase of defence products and technologies, thus facilitating better exploitation of economies of scale in the defence industry and promoting the standardisation of defence systems while improving their interoperability. The development phase, which follows the research and technology phase, entails significant risks and costs that hamper the further exploitation of the results of research and adversely impact the competitiveness of the Union's defence industry. By supporting the development phase, the Programme would contribute to a better exploitation of the results of defence research and would help to cover the gap between research and production. It would also promote all forms of innovation, since the positive effects of such support can be expected to spill over into the civilian sector. The Programme complements activities carried out in accordance with Article 182 of the Treaty on the Functioning of the European Union and it does not cover the production or procurement of defence products or technologies.
(3)
In order to achieve more innovative solutions and to foster an open internal market, the Programme should provide strong support to the cross-border participation of SMEs and help create new market opportunities.
(4)
The Programme should cover a two-year period from 1 January 2019 to 31 December 2020. The financial amount for the implementation of the Programme should be determined for that period.
(5)
This Regulation lays down a financial envelope for the entire duration of the Programme, which is to constitute the prime reference amount, within the meaning of point 17 of the Interinstitutional Agreement of 2 December 2013 between the European Parliament, the Council and the Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management (3), for the European Parliament and the Council during the annual budgetary procedure.
(6)
When implementing the Programme, all funding instruments should be used in accordance with Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council (4), with a view to maximising the development of defence products and technologies. However, in view of the two-year duration of the Programme, the use of financial instruments could raise practical difficulties. Consequently, during that initial period, priority should be given to the use of grants and, in exceptional circumstances, to public procurement. Financial instruments could be an appropriate tool for use in the Fund after 2020.
(7)
The Commission may entrust part of the implementation of the Programme to entities referred to in point (c) of Article 58(1) of Regulation (EU, Euratom) No 966/2012.
(8)
After agreeing on common defence capability priorities at Union-level, particularly through the Capability Development Plan, also taking into account the Coordinated Annual Review on Defence, and with a view to fulfilling the EU's Level of Ambition as agreed by the Council in its conclusions of 14 November 2016 and endorsed by the European Council on 15 December 2016, Member States identify and consolidate military requirements and set the technical specifications of the project.
(9)
Member States should, where appropriate, also appoint a project manager, such as an international project management organisation, for example the Organisation for Joint Armament Cooperation, or an entity, such as the European Defence Agency, to lead the work related to the development of a collaborative action supported by the Programme. Where such an appointment is made, the Commission should consult the project manager on progress made with regard to the action prior to executing the payment to the beneficiary of the eligible action so that the project manager can ensure that the time-frames are respected by the beneficiaries.
(10)
The Union financial support should not affect the transfer of defence-related products within the Union in accordance with Directive 2009/43/EC of the European Parliament and of the Council (5), or the export of defence products, equipment or technologies. Nor should it affect the discretion of Member States regarding policy on the transfer within the Union and the export of such products, including in line with the common rules governing control of exports of military technology and equipment laid down in Council Common Position 2008/944/CFSP (6).
(11)
As the objective of the Programme is to support the competitiveness and efficiency of the Union defence industry by de-risking the development phase of cooperative projects, actions related to the development of a defence product or technology, namely feasibility studies and other accompanying measures, design (including the technical specifications on which the design is based), system prototyping, testing, qualification, certification and increasing efficiency over the life cycle of a defence product or technology, should be eligible for funding under the Programme. The upgrade of existing defence products and technologies, including the interoperability thereof, should also be eligible for funding under the Programme. Actions for the upgrade of existing defence products and technologies should be eligible only where pre-existing information needed to carry out the action is not subject to any restriction in a way that limits the ability to carry out the action.
(12)
Given that the aim of the Programme is, in particular, to enhance cooperation between undertakings across Member States, an action should be eligible for funding under the Programme only if it is to be carried out by a consortium of at least three undertakings based in at least three different Member States.
(13)
Cross-border collaboration between undertakings in the development of defence products and technologies has often been hampered by the difficulty to agree on common technical specifications or standards. The absence or paucity of common technical specifications or standards has led to increased complexity, delays and inflated costs in the development phase. For actions involving a higher level of technological readiness, an agreement on common technical specifications should be a primary condition to be eligible for funding under the Programme. Feasibility studies and actions which aim to support the establishment of common technical specifications or standards should also be eligible for funding under the Programme.
(14)
In order to ensure that, in the implementation of this Regulation, the international obligations of the Union and its Member States are respected, actions relating to products or technologies of which the use, development or production are prohibited by international law should not be eligible for funding under the Programme. In that respect, the eligibility of actions for the development of new defence products or technologies, such as those that are specifically designed to carry out lethal strikes without any human control over the engagement decisions, should also be subject to developments in international law.
(15)
As the Programme aims to enhance the competitiveness and efficiency of the Union's defence industry, only entities which are established in the Union and are not subject to control by a third country or by a third-country entity should, in principle, be eligible for funding. Additionally, in order to ensure the protection of essential security and defence interests of the Union and its Member States, the infrastructure, facilities, assets and resources used by the beneficiaries and subcontractors in an action funded under the Programme, should not be located on the territory of a third country.
(16)
In certain circumstances, it should be possible to derogate from the principle that beneficiaries and subcontractors involved in an action are not subject to control by a third country or by a third-country entity. In that context, undertakings established in the Union that are controlled by a third country or by a third-country entity should be able to be eligible for funding provided that relevant, strict conditions relating to the security and defence interests of the Union and its Member States, as established in the framework of the Common Foreign and Security Policy pursuant to Title V of the Treaty on European Union (TEU), including in terms of strengthening the European Defence Technological and Industrial Base, are fulfilled. The participation of such undertakings should not contravene the objectives of the Programme. Beneficiaries should provide all relevant information about the infrastructure, facilities, assets and resources to be used in the action. Member States' concerns regarding security of supply should also be taken into account.
(17)
Cooperation between beneficiaries and subcontractors involved in the action and undertakings which are established in a third country or which are controlled by a third country or by a third-country entity should also be subject to relevant conditions relating to the security and defence interests of the Union and its Member States. In that context, there should be no unauthorised access by a third country or a third-country entity to classified information relating to the execution of the action. Access to classified information is authorised in accordance with the relevant security rules applicable to European Union classified information and to information classified according to national security classifications.
(18)
Eligible actions developed in the context of Permanent Structured Cooperation in the institutional framework of the Union would ensure enhanced cooperation between undertakings in the different Member States on a continuous basis and would thus directly contribute to the objectives of the Programme. Such actions should therefore be eligible for an increased funding rate. Eligible actions developed with an appropriate level of participation of mid-caps and SMEs, and in particular cross-border SMEs, support the opening up of the supply chains and contribute to the objectives of the Programme. Such actions should therefore be eligible for an increased funding rate, including to compensate for the increased risk and the increased administrative burden.
(19)
If a consortium wishes to participate in an eligible action under the Programme and financial assistance of the Union is to take the form of a grant, the consortium should appoint one of its members as a coordinator. The coordinator should be the principal point of contact with the Commission.
(20)
The promotion of innovation and technological development in the Union defence industry should enable the skills and know-how in the Union's defence industry to be maintained and developed and should contribute to strengthening its technological and industrial autonomy. In that context, the Programme could also help identify where the Union is dependent on third countries for the development of defence products and technologies. Such promotion of innovation and technological development should also take place in a manner consistent with the security and defence interests of the Union. Accordingly, an action's contribution to those interests and to the defence capability priorities agreed by Member States within the framework of the Common Foreign and Security Policy should serve as an award criterion. Within the Union, common defence capability priorities are identified in particular through the Capability Development Plan. Other Union processes such as the Coordinated Annual Review on Defence and the Permanent Structured Cooperation support the implementation of relevant priorities through enhanced cooperation. Where appropriate, regional and international priorities, including those in the NATO context, may also be taken into account, on condition that they serve the Union's security and defence interests and do not prevent any Member State from participating, while also taking account of the need to avoid unnecessary duplication.
(21)
The Member States work individually and jointly on the development, production and operational use of unmanned aircraft, vehicles and vessels. Operational use in this context comprises carrying out strikes on military targets. The research and development associated with the development of such systems, including both military and civilian systems, have been supported by Union funds. It is planned that this will continue, possibly also under the Programme. Nothing in this Regulation should hinder the legitimate use of such defence products or technologies developed under the Programme.
(22)
In order to ensure that the funded actions are viable, Member States' commitment to effectively contribute to the financing of the action should be established in writing for example by a letter of intent by the Member States concerned.
(23)
In order to ensure that the funded actions contribute to the competitiveness and efficiency of the European defence industry, they should be market-oriented, demand driven and commercially viable in the medium to long term, including for dual-use technologies. The eligibility criteria should therefore take into account the fact that Member States intend to procure the final defence product, or use the technology, in a coordinated way, while the award criteria should take into account the fact that Member States commit politically or legally, to jointly use, own or maintain the final defence product or technology.
(24)
All award criteria should be taken into account when evaluating actions proposed for funding under the Programme. Since those criteria are not eliminatory, proposed actions that fail to satisfy one or several of those criteria should not be automatically excluded.
(25)
The financial assistance of the Union under the Programme should not exceed 20 % of the eligible cost of the action where it relates to system prototyping, which is often the most costly action in the development phase. However, it should be possible to cover the totality of the eligible costs for other actions in the development phase. In both instances, eligible costs should be understood within the meaning of Article 126 of Regulation (EU, Euratom) No 966/2012.
(26)
As the Programme should complement research activities, in particular in the defence area, and for the sake of consistency and administrative simplification, the same rules as those in the Preparatory Action on Defence Research (PADR) and the Horizon 2020 Framework Programme for Research and Innovation (2014-2020) (‘Horizon 2020’) should, to the extent possible, apply to the Programme. It is therefore appropriate to allow for the reimbursement of indirect costs at a flat rate of 25 % as under PADR and Horizon 2020.
(27)
As Union support aims to enhance the competitiveness of the defence sector and concerns only the specific development phase, the Union should not have ownership of or intellectual property rights in the defence products or technologies resulting from the funded actions. The applicable intellectual property rights regime is to be agreed contractually by the beneficiaries. Interested Member States should also have the possibility to participate in follow-up cooperative procurement. Furthermore, the results of actions funded under the Programme should not be subject to control or restriction by a third country or a third-country entity.
(28)
The Commission should establish a two-year work programme in line with the objectives of the Programme. The work programme should set out in detail the categories of projects to be funded under the Programme, including defence products and technologies such as remotely piloted systems, satellite communications, positioning, navigation and timing, autonomous access to space and permanent earth observation, energy sustainability, and cyber and maritime security, as well as high-end military capabilities in the air, land, maritime and joint domains, including enhanced situational awareness, protection, mobility, logistics and medical support and strategic enablers.
(29)
The Commission should be assisted in the establishment of the work programme by a committee of Member States (‘committee’). The Commission should endeavour to find solutions which command the widest possible support within the committee. In that context, the committee may meet in the format of national defence experts to provide specific assistance to the Commission. It is for the Member States to designate their respective representatives on that committee. Committee members should be given early and effective opportunities to examine the draft implementing acts and express their views.
(30)
In light of the Union policy on SMEs as being key to ensuring economic growth, innovation, job creation, and social integration in the Union and the fact that the actions supported typically require trans-national collaboration, it is of importance that the work programme reflect and enable open and transparent cross-border access and participation of SMEs, and that therefore at least 10 % of the overall budget benefit such actions, allowing SMEs to be included in the value chains of the actions. A category of projects should be specifically dedicated to SMEs.
(31)
To ensure the success of the Programme, the Commission should endeavour to maintain a dialogue with a broad spectrum of Europe's industry, including SMEs and non-traditional suppliers to the defence sector.
(32)
In order to benefit from its expertise in the defence sector, and in accordance with the competences attributed to it by the TEU, the European Defence Agency should be invited as observer in the committee. The European External Action Service should also be invited to assist.
(33)
As a general rule, for the selection of actions to be funded by the Programme, the Commission or the entities referred to in point (c) of Article 58(1) of Regulation (EU, Euratom) No 966/2012 should organise competitive calls as provided for in that Regulation, and should ensure that the administrative procedures are kept as simple as possible and incur a minimum amount of additional expenses. However, in certain duly justified and exceptional circumstances, Union funding may also be granted in accordance with Article 190 of Commission Delegated Regulation (EU) No 1268/2012 (7).
(34)
After evaluation of the proposals with the help of independent experts, whose security credentials should be validated by Member States, the Commission should select the actions to be funded under the Programme. The Commission should establish a database of independent experts. The database should not be made public. The independent experts should be appointed on the basis of their skills, experience and knowledge, taking account of the tasks to be assigned to them. As far as possible, when appointing the independent experts, the Commission should take appropriate measures to seek a balanced composition within the expert groups and evaluation panels in terms of variety of skills, experience, knowledge, geographical diversity and gender, taking into account the situation in the field of the action. An appropriate rotation of experts and appropriate private-public sector balance should also be sought. In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission as regards the adoption and the implementation of the work programme, as well as for awarding the funding to selected actions. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council (8). Member States should be informed of the evaluation results and progress in the funded actions.
(35)
The examination procedure should be used for the adoption of those implementing acts taking into account their substantial implications for the implementation of this Regulation.
(36)
The Commission should draw up an implementation report at the end of the Programme, examining the financial activities in terms of their financial implementation results and where possible, their impact. The implementation report should also analyse the cross-border participation of SMEs and mid-caps in actions under the Programme as well as the participation of SMEs and mid-caps in the global value chain. The report should also include information on the origin of beneficiaries and the distribution of the generated intellectual property rights.
(37)
The financial interests of the Union should be protected through proportionate measures throughout the expenditure cycle, including the prevention, detection and investigation of irregularities, the recovery of funds lost, wrongly paid or incorrectly used and, where appropriate, administrative and financial penalties.
(38)
The Commission and the Member States should ensure the widest possible promotion of the Programme in order to increase its effectiveness and thus to improve the competitiveness of the defence industry and defence capabilities of the Member States.
(39)
Since the objectives of this Regulation cannot be sufficiently achieved by the Member States in view of the costs and associated risks but can rather be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the TEU. In accordance with the principle of proportionality as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives,
