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The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
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How a Legal Mystery Reveals the Continuing EU Threat to UK Shipbuilding

Shipbuilding

For years, politicians and industry associations have claimed that the UK can simply ignoring EU defence contract rules which require an international competition where the cheapest bid wins.


If the rules were rigid, UK defence and shipbuilding industry would lose many UK Government contract overseas. But the rules are not rigid, they have always claimed, while insisting simultaneously that EU rules can be dis-applied with a waiver and that it was the Government's own decisions which sent work and money abroad. Definitely not EU rules, they said… definitely, definitely not those nice EU rules.


It would be great if it were true, but it isn't.


After four years of studying these devastating EU rules, I have never found this comprehensive waiver of which they speak.


The problem for our country now is that we have promised the EU that we will keep these legacy EU rules the same even now we have left. Clauses in the TCA say that the UK will avoid such changes to public procurement law which create a 'market distorting' effect.


If the UK scrapped the legacy EU rules, the market would certainly be 'distorted' but in a way that helps us keep defence-related contracts at home whenever we choose, therefore enhancing the UK's strategic defence and shipbuilding industry. This is a right under World Trade Organisation rules which all our principle non-EU partners use to full effect. It has sound reasons of strategic capability behind it, but a bonus of jobs and investment.


Back to the waiver. There are indeed rare and narrow exemptions in EU defence procurement rules, but nothing which would give Government the chance to keep all defence contracts in the UK at a whim.


So why are MPs, industry, trade unions and commentators so misled? Why are the protecting the rules which harm their interests?


I investigated this problem to find out what the people protecting EU rules think they are talking about. If their method did not hold water, it would be possible to finally demonstrate to the defence community that EU rules are the real problem and freeze any contracts until we are out of them.


This explanation was, however, very difficult to find.


I began my search for an explanation after a Labour Party press conference at the end of August. Labour defence spokesman John Healey called on ministers to award the imminent £1.5bn contract to British shipyards. It was the third time around for this Labour campaign which had started under Corbyn in 2016. However, Healey added that Sir Keir Starmer's Labour would also apply a 'Built in Britain' test for other UK military hardware.


I called and emailed the Labour Party and John Healey's office to ask which of the EU's permitted exemptions they would use for all these promises. I also asked about how they would conduct a 'built in Britain' campaign when this is specifically banned by the EU defence procurement directive and the UK laws it created.


After an eager initial response from a press officer, I received no reply. When I pushed for a response, they said trade unions had done the policy crunching and had decided it all made sense. If They sent me a short excerpt from a Trade Union Congress (TUC) pamphlet which repeated the Labour claim but it did not provide any legal route for obviating the EU requirement for international competition.


So I checked with the TUC directly and received no legal explanation, just a statement that 'EU rules were definitely not the problem' and the rules were flexible enough that obstinate ministers could choose to keep the contracts at home. Their policy line, they added, was 'a widely held understanding' supported by maritime industry. They could offer no further clarity on which EU exemption they would use to bypass EU rules, but they suggested speaking to trade associations such as MaritimeUK.


This is where it started to feel like a merry-go-round.


I had high hopes for the prestigious MaritimeUK, but these hopes were soon dashed.


Their quick-fire spokesman gave a confident telephone speech about the huge benefit to British shipbuilding if the contract competition was limited to the UK, so I asked, 'Which exemption would you use?'


Silence.


The break in the conversation allowed me to clarify: 'It's just that the EU and European Court of Justice are very strict. They say international competition is mandatory under the EU defence directive apart from the most exceptional cases where their narrow exemptions apply. So which one applies here?'


The answer: 'I don't know. But I know someone who might know.'


I was then copied into an email to a policy person from yet another organisation.


More merry-go-round.


This person was senior, well-connected and experienced and, on condition that I would protect his identity, provided a very candid rendition of the landscape, including the fabled explanation of why Westminster and the whole British defence commentariat had come to believe that the EU's defence contract rules could somehow be bypassed and why everyone believed that the rules were not in themselves an obstacle.


It goes like this, and be warned, it does not resemble anything which the EU regards as an adequate excuse:

It was not originally his idea, he said, but the feeling was that the UK should 'try out' a line with the EU which said that the UK needs to keep its shipyards exercised with an order book which is bigger than complex warships alone. Being able to do that, he said, was a national security issue and the UK could attempt to persuade the EU that this desire for extra work met the conditions of the security exemption.


I couldn't believe what I was hearing.


I almost felt pity on hearing such a doomed excuse.


The security exemption under Article 346 of the Treaty on the Functioning of the EU does not allow a definition of national security interests which covers attempts to boost national strategic shipbuilding capacity.


According to the EU, the protection of strategic contracts 'contrasts with the operational objective of the Directive, that the majority of contracts in the fields of defence and security should be awarded on the basis of EU procurement rules'. (EU Commission Staff Working Document 2016 on the Evaluation of Directive 2009/81/EC on public procurement in the fields of defence and security).


In fact, it was the EU's desire to quell this precise type of domestic focused approach which led to the EU creating the defence procurement directive with all its new limitations. They aimed to interfere with member states' links to their national industry in order to encourage the notion that 'domestic' procurement means 'EU'. A whole regulatory landscape has since been built and is pushing EU strategic defence industry alongside EU budgets, projects, targets and infringement action for non-compliant states.


I mentioned some of these points to our well-placed policy person and conceded that trying this approach 'would be a risk' which might fail, but the current thinking of industry is that it was 'worth a try'.


Gulp.


It is not worth a try; it is completely flawed.


The security exemption does not allow the UK to bolster domestic industry by giving it a badge saying 'strategic'. In fact this is expressly forbidden as a discriminatory and market-distorting practice.


The livelihoods of thousands of shipyard workers have been relying on this fallacy. Their trade union supporters and the whole maritime industry would have done much better to call for an end to EU rules and entry into the World Trade Organisation's GPA agreement which gives a proper exemption for defence. Canada, for example, has constructed a 20-year shipbuilding programme which keeps all defence, military support and coastguard shipbuilding in Canada.


Here are a few excerpts from the EU law which illustrate this complex point.


The EU Commission says that the EU defence procurement directive makes it harder, in practice, to resort to Article 346. To dodge the international competition requirement of the EU directive, a member state must be prepared to "demonstrate that the non-application of the Directive is necessary and proportionate" for the protection of its essential security interests.


Vincenzo Randazzo, a legal officer at the EU Commission, writes in a briefing paper that there will still be member states who try to rely on Article 346 in order to not apply the Directive and anticipates that "they could argue that a procurement contract involves such extreme security of supply requirements and/or is so confidential that even the specific provisions of the Directive are insufficient to protect their essential security interests."


This excuse could not be used for the UK's imminent supports ship contract.


Randazzo, citing ECJ case law, adds that the key challenge for member states attempting to diverge from the EU directive is to 'prove the necessity and proportionality of the specific measure' which the member state believe gives them a right to derogate from EU law in spite of the safeguards the EU provides, such as a ban on bidders who fail to meet security of information requirements.


For instance, the strategic supply argument would fall down if an ECJ judge was convinced that the UK would retain a right to procure ships from French or Spanish shipyards or from anywhere else in the EU at the same specification. In light of the EU's stance against member state protectionism, it would arguably then be impossible for the UK to prove that it has a strategic imperative for maintaining a percentage increase in the order-book of its own domestic industry. (An ECJ judgement would no doubt be influenced by the knowledge that member states, including the UK until at least the end of 2020, are guided by the same EU Common Security and Defence Policy and have even jointly agreed the new concept of EU Strategic Autonomy for defence and defence industrial matters.)


EU case law shows that member states have made 12 attempts to retain contracts in their national defence industry by using a generalised allusion to security interests but failing to use the EU's specific exemption wordings – and they have all failed.


There was another point which the senior industry policy official mentioned: he said there was a debate about whether the fleet support ships were a military or civilian contract. The EU should be persuaded that they are military, he said, because they are used for the supply of military vessels despite being mainly crewed by civilians in peacetime.


Sadly, this seems like a spurious question and yet another distraction because the nature of the contracts as military is beyond question. The UK Government has repeatedly said the contract for the ships would be via the EU's defence procurement directive and the UK's equivalent law. The nature of the contracts as military does not aid the case for an exemption from international competition, it reinforces the point that the contracts would be done under the EU defence procurement directive. The question of whether the ships are 'military or not' is a decades old argument from before the EU defence directive and its (lack of) exemptions were written into law.


My quest for an answer is now over, but the problem of EU rules is destined to continue, potentially for years.


The UK version of the EU rules still exists on the statute books. MPs made cosmetic changes to reflect the UK's status out of EU membership, but the ethos remained the same and so did the very narrow set of exemptions as it would inherit EU case law as if it were the UK's. If it is not urgently changed in the new year, the problem of losing contracts abroad unnecessarily will persist.


MPs would be wise to scrap the EU's Defence& Security Procurement Directive (DSPCR) altogether as it is an invention of the EU Commission.


The UK can instead apply general procurement law and in accordance with the WTO's Government Procurement Agreement can apply an exemption from international competition for any defence contracts the UK wishes to keep at home for strategic gain, which happens to be economic gain too. The UK would be free to write its own legal case law on the subject and the UK, not the EU, would be the arbiter of what constitutes strategic security interests.


It is highly likely that this misreading of EU law was encouraged by a pro-EU faction, particularly EU-funded trade unions, who will want to defend EU rules at all costs.


Therefore, any battle to remove DSPCR will be yet another fight between Brexiteers on the side of UK shipyard workers and Remainers on the side of the EU Commission and EU-wide defence industrial strategy. Can this government of "take back control" and "Red Wall MPs" really be on the side of the Eu and EU defence industries? 

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