Regulatory policy

Germany Announces Major Change in Defense Procurement Policy | Hogan Lovells

The Russian attack on Ukraine triggered a total shift in German defense procurement policy. The German government has not only announced the introduction of a massive extraordinary defense budget of 100 billion euros, but also the intention to conclude contracts more quickly, which requires profound changes in procurement procedures .

Past shortcomings in German defense purchases

In the past, there have been notorious delays and problems with German defense purchases, leading to delays and cost increases. According to the German Armaments Report 2021, project delays have increased further to an average of 49 months compared to the first parliamentary referral. According to the report, the cost averaged around 14 billion euros, about 25% more than the estimate at the start of the project. Yet until a few weeks ago, spending more money on defense was an unpopular political topic in Germany that did not feature high on the agenda of the newly formed German government.

In response to the Russian invasion of Ukraine, German Chancellor Olaf Scholz announced fundamental changes to this position. The extraordinary budget of 100 billion euros must be used to improve the capabilities of the German armed forces quickly and without unnecessary delays. This requires several procedural changes, as the rather rigid EU and German procurement rules have proven to be one of the reasons for delays in defense procurement projects.

A European solution to a German problem

The German Federal Ministry of Defense now intends to make use of a derogation from European public procurement law under Article 346(1) of the Treaty on the Functioning of the European Union (TFEU) to the extent possible to shorten procurement procedures. According to Article 346(1) TFEU, any EU Member State may take the measures it deems necessary to protect its essential security interests relating to the production of or trade in arms, ammunition and war material. Since this exemption is enshrined at EU treaty level, it can be applied directly without changing existing legislation or coordinating with EU bodies.

The consequence of resorting to Art. 346 (1) TFEU is a derogation from formal public procurement procedures. Instead, the government can enter into sole-source agreements with suppliers that are not subject to a legal review process by procurement tribunals and tribunals. In the past, several projects have run into obstacles because bidders or competitors have challenged decisions made by the German defense procurement agency BAAINBw, leading to contract award deferrals.

It should however be noted that Article 346(1) TFEU is an exceptional provision which must be interpreted strictly in accordance with the case law of the Court of Justice of the European Communities. National authorities can only deviate from EU law on a case-by-case basis if and insofar as appears necessary to safeguard essential national security interests. Even though Member States have a wide margin of appreciation with regard to the requirements of Article 346(1) TFEU and the current situation presents clear concerns for national security, every procurement proposal must be examined individually and the burden of proof lies with the Member State that the actual conditions of the exception are fulfilled. The government can be expected to invoke the exception especially for the purchase of basic military equipment such as weapons, tanks, ships or aircraft.

It is unclear whether Article 346(1) TFEU allows Member States to establish a permanent regulatory regime or whether only temporary measures are permitted. The German government has already announced that it currently plans to rely on the exception only temporarily. Ultimately, it will hardly be possible to set a deadline. Rather, the admissibility of maintaining the measures should depend on the nature and duration of the alleged security threat.

Additional national measures

For procurement projects that have already been launched, the German government can also rely on other means to speed up the process without completely deviating from formal public procurement law. The government has already declared a particular urgency of the request pursuant to Sec. 12 (1) b) of the German Defense Procurement Regulations for the management of tenders, which allows a shortcut to avoid a pre-qualification competition before the award of the contract. In addition, the government is said to have asked market players to refrain from protesting bids in the current crisis to allow contracts to be awarded quickly. However, this is only a political request that has no legal basis outside of projects falling under Article 346 TFEU.

Finally, the government is planning a general relaxation of defense procurement law at national level and, if necessary, also at European level: in future, orders worth up to 5,000 euros can be awarded without a call for tenders. Although this does not affect the acquisition of hard armaments, investments of up to 5,000 euros represent about a quarter of all supply orders placed by the BAAINBw. The agency can thus free up resources for the growing number of larger investment projects.

Next steps

Conclusion

This change in defense procurement rules will have a significant impact on current and future procurement projects in Germany. Simply increasing the financial resources available does not automatically solve the complexities of the procurement process, but there seems to be political support for a fundamental shift towards faster award decision-making. Furthermore, it is likely that there will be less additional requirements and adaptations to specific German wishes, but rather a focus on off-the-shelf military procurement (MOTS). If the ambitious plans are implemented as announced, a faster award decision is likely to be welcomed by the industry, although in individual situations there will be less legal protection for bidders and competitors against the decisions. procurement authorities.

*intern in our Brussels office, contributed to this article.