Offsets Pros and Cons Current state of affairs

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1 Offsets Pros and Cons Current state of affairs Jan Pie Secretary General Swedish Security & Defence Industry 07/02/2011 1

2 Disposition Contemporary Offset practices Offsets in a market context; some reflexions SMEs and offsets Ongoing debate in Europe Conclusions 07/02/2011 2

3 Offset requirements in the international market European demands for industrial compensation typically: At least 100% on orders exceeding Euro million 20 50% direct in procured system and/or defence industry High technology SME, dual use etc. Civil operations Regional allocation Penalties, at least, equivalent to 5 15% of a missing portion 07/02/2011 3

4 Offset Requirements in the International Market Some Governments do not officially call for compensation, but require substantial, national, industrial participation as a prerequisite for doing business with foreign suppliers. Examples of such countries: USA Germany France Italy (UK) 07/02/2011 4

5 The Shaping of an EDEM on a Level Playing Field; an outline of crucial aspects National DIS as the fundaments of EDTIB Government ownerships, state aid and multinational industries Efforts to Restructure and Concentrate the European Defence Industry European preference v. Non-European competition and Control of assets Intra community transfer Directive Standards; European and/or global Common regulated export policy REACH exceptions Security of Supply and Information ideas of political reliability National use and application of article 346 TEUF Defence Procurement Directive; national transposition and practice Practice of offsets Distribution of R&D funding, the IPR complex The future role and focus of the European Commission, ECJ and EDA Anti-corruption conditions Political dimensions, tradition, culture etc between the lines 07/02/2011 5

6 National Defence Industrial Strategy; Centres of Excellence; Model for Analysis Operational needs Industrial conditions Suitable CoE Offset Strategy National security needs for national competence Possible CoE after enhancing the competence Independent industry activity Export market for technology and international co-operation 07/02/2011 6

7 Why not Bi-/Multilateral Co-operation Programmes? National interests; technology base, employment Security (of supply) - Art 346 TFEU Limited harmonization of requirements and specifications Different life cycles and budgetary stability; timing No common European armament policy Lack of stakeholder CoE and industrial skills Links between national sovereignty, military capability and national production Security policy, National culture, prestige and other political motives... 07/02/2011 7

8 EDA efforts Code of Conduct for Offsets 2008 In present support of EDTIB Basic rules and limits Library of Offset Regulations and Guidelines System for monitoring and feed back to subscribing Member States (sms) All Under Art 346 TFEU and Defence related; national essential security interests 07/02/2011 8

9 Centres of Excellence with Regional Distribution in Europe? A reasonable CoE distribution - a condition for EDTIB and EDEM credibility?! EDTIB structuring Art 346 TFEU, or not is a difficult and polemical matter Dominating states and industrial conglomerates have many reasons and ways to pull together CoE to themselves If consciously regulated, offsets defence related and civil - may provide useful tools for this common European aim 07/02/2011 9

10 Offset and Industrial Co-operation Vital Factor in Defence Procurements Product Price Financing Industrial Cooperation Politics Choice due to a combination of factors 07/02/

11 Offset and Industrial Co-operation Suppressed Factor in Defence Procurements Product Price Financing Industrial Cooperation Politics Combination of factors 07/02/

12 Transparency in the Defence Equipment Market Product features (Foreign) Politics Financial package Industrial programmes 07/02/

13 Effects of transparent offsets; strived for Compatible with open competition on a LPF Slightly Opening Actual Protectionist door Entrance to cooperative (R&T) programs Inspiring to increased technology exchange Pushing mergers of competence centres Balance in interchange with third countries Supporting SME international exposure Counter acting the trend of a monopoly EDEM 07/02/

14 Exclusions practiced; DPD Art 13 (c) a.o. Franco-British co-operation agreement, November 2010, will/may change the political as well as the European Defence Technology and Industrial, EDTIB, landscape; Strategy Operations Pooling and Sharing Research, technology and development Procurement Cost share Work share 07/02/

15 SMEs and Offsets SMEs to be guided to business making positions by e.g. Governments and National Industry Associations SMEs supported by EU institutions and agencies, EDA SMEs are generally less suited to meet industrial cooperation demands in export contracts; can be handled by offset thresholds in the supply chain, Lead System Integrators and buyers Offsets offer international business exposure prerequisites for SMEs and serves as an engine for cross border distribution of work! 07/02/

16 Topical situation The burning debate connected to the implementation of Directive 2009/81/EC Directorate General Internal Markets and Services, DG Markt, has 2010 published a Guidance Note on Offsets Offsets are not expressively mentioned in EU Treaty nor in any secondary law e.g. Directive Unbroken practice globally and in Europe; but now or never! 07/02/

17 Guidance Note on Offsets Offset practises vary considerably between MS requirements are restrictive measures against the basis of the Treaty; the Directive allows MS to protect legitimate security interests and competition in the supply chain via SoS and Sub-contracting articles under article 346 TFEU - but shall not adversely affect the common market only case-by-case, no national catch all rules 07/02/

18 Legal Framework Primary law Internal market is built on the (four) freedoms Implies prohibition of restrictions on imports and exports or equivalent e.g. inducing purchasing from domestic and/or specific producers and/or encouragement by non-binding measures resulting in barriers to intra-trade Services: prohibition against any restriction less advantageous to provider from other MS Prohibition against any discrimination on grounds of nationality 07/02/

19 Legal Framework Directive 2009/81/EC Contracting authorities shall treat economic operators equally, non-discriminatory and act transparently no discrimination targeting supply chains Verification and selection of suitable candidates; transparent ability required to be proportionate Conditions for performance of a contract must be compatible with EU law related to the performance of the contract itself 07/02/

20 EDA Commenting Letter (to DG Markt) 1. EDA supports MS to improve EU s defence capabilities; together with COM for a transparent and competitive EDEM and a strong EDTIB; underpinning CSDP 2. EDA Regime and EBB since four years serves this purpose for MS, AF, taxpayers and Industry 3. So does COM Defence Package 4.The defence market is linked to national sovereignty, specific and influenced by broader political considerations as recognized by Art 346 TFEU; one measure vital to maintain SoS and operational sovereignty are defence offsets 07/02/

21 5. The EDTIB strategy 2007 ultimately aims at a market where offset is no longer needed, meanwhile mitigating adverse impact 6. Thus, in 2008, Code of Conduct on Offsets under Art Directing Offsets towards strengthening of the EDTIB ensures pms AF s needs and sovereignty 8. The Directive does not refer to offsets at all and offsets is subject to Art 346 that gives MS possibility to exempt contracts for national security reasons. COM Guidance Note can be considered as unhelpful and at conflict with MS decisions 07/02/

22 9. A significant nummer of MS and EDA I&M Director has asked to withdraw the Guidance Note on Offsets; despite this we understand that COM will press ahead 10. On account of MS concerns I would welcome an early resolution and your withdrawal the Note. If not it will undermine efforts to bring transparency into EDEM and send unhelpful messages to industry and third countries. It could also have serious effects for MS who rely upon offsets as a key enabler in developing their military capabilities 07/02/

23 Commission, DG Markt, attitude Offset and other activities relating to - The European Defence Technological and Industrial Base and - A Level Playing Field are basically - Common Market Matters thus out of European Defence Agencies task A treat to the very Raison d'être of EDA... 23

24 What now!? The main rationale for offsets is Market Access Use legal measures to support the real goals Opening Actual Protectionist door Entrance to cooperative (R&T) programs Inspiring to increased technology exchange Pushing mergers of competence centres Balance in interchange with third countries Supporting SME international exposure Counter acting the trend of a monopoly EDEM National actions: to be strongly based in the democratic process; White Papers, Defence Industrial Strategy etc. Continue discussion with EU institutions 07/02/

25 Letter to DG Markt by 14 National Defence Industry Associations 07/02/

26 If Ban: Instead of customary Offsets Corporate Social Responsibility, CSR Increased cooperation in trade and economy based on political agreements Defence and security cooperation and/or support based on political agreements Reference to Art. 346 TFEU, with well worked out political motivation e.g. o Security of Supply and/or Information o Preserving security essential technology sector 07/02/

27 Alternatives to the Present Offsets Practice Smaller nations normally have less Security Policy related interests and arguments... But if nothing else: Do as the dominating EU Defence Industry actors and Member States do! 07/02/