Defence procurement in the European Union
Interview with Baudouin Heuninckx, Chief Counsel of the Belgian Armed Forces Procurement Division and a part-time academic at the University of Nottingham and also the Belgian Royal Military Academy. He has just published a book on defence procurement as of November 2016 entitled The Law of Collaborative Defence Procurement in the European Union.
Hello Baudouin, welcome to the programme.
Thank you, Pedro. Good evening.
I’m going to start by doing something that I usually don’t do is tell a story about the guest, in this case you. So for the benefit of the listeners both myself and Baud did our PhDs in Law pretty much at the same time at the University of Nottingham and I remember one day having a conversation with our supervisor, Professor Sue Arrowsmith, about supervision of PhD students and she was very adamant that a PhD was a programme or a project that needed to be done full-time and she was never very keen in taking part-time PhD students, but there was one exception and there was this guy who worked for the Belgian military and I think did not have a legal background but actually has a very keen interest in studying law and doing research into law. So she was very relaxed into having as a part-time PhD student that particular person, in this case Baudouin, and I’m not aware that she has had any others ever since. So, Baudouin, starting by that story, how did you end up doing a PhD in Public Procurement Law?
Well, actually at the time I was working for an international organisation being detached from the Belgian Armed Forces and I was finishing a Masters degree in EU Law and writing my final essay on public procurement. And I was asking myself why does that organisation I’m working for not apply the EU public procurement directives. At the time there was no defence and security directive but there was still the 2014 Directive, and I asked a number of people including the legal advisor of the organisation and I didn’t get any satisfactory answer. Actually at some point he told me that as my job was not dealing with legal issue, I had to stop bothering him and I started asking that question to other people working for other international organisations and I never got any satisfactory answer, either. So usually when you’re asking a question and you don’t find anyone who can give you an answer, that’s a good topic for a PhD, I think.
That is correct. However, you don’t have a background in law, so you did the Masters in Law but that was part-time too, am I correct?
Yeah, that’s true. I’m an engineer to start with.
That was almost ten years ago. I think we started our PhDs more or less at the same time, 2007.
So you did your PhD and you kept on working first at that international organisation and then back into the Belgian military or the air force?
What led you then to afterwards actually writing a book about defence procurement in the European Union?
Well, the funny thing was that on the topic of my PhD I was thinking that, yeah, I would just start by reading the existing literature on the procurement rules of international organisations and I didn’t find anything. Basically there is a lady in Italy [post-interview note: Elisabetta Morlino] who has done a PhD on that topic at about the same time as us but next to that there’s basically nothing, so going further than that “if you have a question nobody can answer, you can do a PhD on it” and if when doing your PhD you realise that there is basically no literature dealing with the specific topic of your PhD, it’s worth making a book about it.
So you had the idea of doing this actual book while we were still doing the PhD?
About the end of the PhD, yes. Let’s say the last year. I did the PhD in four years part-time. About the last year of the PhD I really had the idea that a book was useful.
And what were you trying to achieve with it?
Well, first of all to try to raise the awareness of the people dealing with those large collaborative procurement programmes in the defence sector, you know, those when a number of countries decide to buy together some piece of equipment, fighter aircraft or battleship, and because I’ve realised that the legal background or the legal structure of those programmes has never really been subject to a model or to an analysis, so to try to get some structure, get some order into what people are doing in all those programmes.
And in terms of findings, what did you find when you were doing that kind of work in that kind of analysis of the collaborative procurement projects in Europe in the field of defence?
Well, first of all that not many people are actually asking themselves questions about what legal framework and legal structure are applicable to those programmes and actually it’s quite complex because you have national law or domestic law that rules on the decision of the participating states to participate in the programme. Obviously that’s influenced by EU procurement law but that relationship is not that clear. And then you have the relationship between the states that participates in the programme and that’s in public international law, and then you have the procurement rules of the organisation or the entity managing the programme itself and that can be international institutional law or that could be domestic law influenced by European law. So that’s really, let’s say, a nexus of domestic law, international law and EU law, and it’s quite complex and not many people are actually aware of that complexity.
That makes perfect sense in terms of what you just described because every time I talk with people that, in an area that has nothing to do with defence, let’s say, normal procurement, they think about doing collaborative procurement themselves and I just always ask myself, okay, right, so you want to do some procurement with another organisation in another member state, what rules will apply? So it’s going to apply the national rules of your country, national rules of the other country, your rules, international law. It just becomes very, very complex very quickly. So in the field of defence procurement, how are those issues solved?
Basically I don’t think many people have been asking themselves the question. As long as each country follows its internal law and regulations in deciding to participate in a programme, I don’t think many people ask themselves the question if what is going further, especially the procurement rules of the organisation, are in accordance with EU law or if they should be in accordance with EU law. I think that people are getting a little bit more sensible or sensitive to that topic, but yeah, that’s still an open issue, I think.
Why are people getting more sensible or sensitive to that topic?
First, because people are starting to talk about it, the fact that I’m making regular presentations and writing articles on the issue is probably raising the awareness of people about what they’re doing. And second, because, especially in the field of defence, the European Commission is more and more trying to close all the loopholes that were allowing the EU member states to do a little bit what they wanted within the defence sector.
But they still pretty much can do what they want. I mean, looking at the directive 2009/81 the limitations imposed on member states are fairly light and flexible in comparison with, say, the general procurement directive 2014/24.
That’s true and that was one of the reasons why the defence directive was adopted because there was a view from the member states and from the defence industry that defence was too complex to have strict rules to be followed like open procedure, restricted procedure, and that more flexibility was to be allowed, so what did the Commission do? The Commission gave them a directive that gave them that flexibility. Now obviously – or maybe it’s not so obvious – one of the reasons why the member states wanted flexibility was to award defence contracts to their domestic industry but obviously they could not say that.
So, as I wrote in one of my articles, actually it’s a kind of trick or treat game between the member states and the Commission. Member states said we want more flexibility, the Commission said we give you more flexibility but then you have still to comply with the principles of non-discrimination, equal treatment, transparency and so on. So the Commission is actually waiting for very obvious cases of, let’s say, breaches of EU law to send some EU member states to the Court of Justice and make its point that defence procurement has as a general rule to follow EU law.
And you think the practice has changed ever since the directive came into force and has been transposed into national law?
I think it has changed somewhat but you still see a number of EU member states that are basically applying the directive for all procurements that’s not extremely significant or not extremely sensitive, but for major procurement they are still using the exemptions of the EU Treaty like Article 346 to still either buy from their domestic industry or to ask for the infamous or famous offsets industrial return in their countries.
So it’s 2016 now, almost 2017, are offsets still a thing in defence procurement today in Europe?
Oh, yes, absolutely.
Oh yeah, yeah. Well, on the other hand it’s understandable because – and I’m not saying that offsets are legally acceptable, that’s another issue – but from a political point of view it’s understandable because if you’re buying warships and it’s a programme that cost billions of Euros and next to that we’re telling the public that we need to tighten social security, reduce benefits, those kinds of things, how can you make the voters accept those kind of big military expenses if you cannot tell them at the same time “and by the way they will create that many hundreds or thousands of jobs in the country”? So from a political point of view, it’s a very sensitive issue and it’s basically almost impossible, especially in medium or small member states, to justify to the general public that you’re spending that much money without any return in country and that’s something that the European Commission, for instance, or some academics have some difficulties to understand. It’s true that, if you look at them from a purely legal point of view, those kind of offsets or industrial return are clearly against EU law unless you can justify them with the Article 346 exclusion, but from a political point of view it’s difficult to do away with them actually.
Okay. I find that very interesting because the impression I have is by and large offsets do not work and certainly do not work as intended and that is the best-case scenario but please do correct me. And the worst-case scenario actually is that offsets work as vehicles of corruption. I’m not necessarily only talking about Europe in particular, I’m talking about defence procurement in general.
You’re actually mostly right there, Pedro. Offset can work in some cases but it’s true that especially, let’s say, outside of Europe, if you don’t have the adequate industrial base to actually perform the offsets, then it’s very hard to make them work. On the other hand, and I will be a little bit cynical there, I’m not entirely sure that the governments actually...
Care about the offsets.
...aim for offsets to work. If they work, so much the better but what they must be able to do is to make a big announcement at the time of the launch for the programme that there will be offsets and whether or not they fully work is something that comes down in the years later and people in the meantime will have forgotten about it. I’m a little bit cynical there but I think that by and large that’s an important point.
The story I remember about offsets in connection with Portugal was, actually it’s two stories I think, one when we bought the submarines from the Germans maybe, I don’t know, maybe 12, 14 years ago, and more or less at the same time that we also bought some sort of armoured personnel carrier vehicle from an Austrian supplier. And the situation with the submarines was never very well explained in terms of the offsets but it was clear that the same company, of which I can’t remember the name, was involved in some corruption scandals with offsets in Greece, more or less at the same time. So there’s always these, let’s say, impression or fog in Portugal about how probably the same thing happened there but no one has actually put the finger and I don’t remember the cases making it through the courts. So my perspective of the offsets is that it’s very negative. It’s very negative because you effectively shoehorn into a contract something that is not connected with it and the company that is actually providing you with the main contract is not necessarily the best supplier to actually provide you with the offsets or actually making the offsets work in reality afterwards.
Yes, well, if we can use examples, you mention Portugal, I will mention Belgium which is a case I know very well. At the beginning of the 1990s we bought helicopters and electronic counter measure systems and those two procurement were linked to a major corruption case that actually went to the courts and where, I think, half a dozen politicians at the time were actually convicted and banned from politics for having been corrupted by the companies who were awarded those contracts. So indeed offsets increase the risk of corruption, not only in developing countries but also in developed countries. And if you read the academic literature on offsets, you will see very negative views on the fact that they increase the cost of the equipment, that the quality is substandard, that there is a risk of corruption… On the other hand you can find some others who would say that actually it’s very difficult to measure the actual impact of the offsets because probably they will increase the cost of the equipment but if the offset actually worked in the sense of generating work or labour in the country, that could somehow balance itself. And the problem is that most people doing those analyses are either a little bit biased towards a completely open economy and therefore as a principle are against offsets, or are, let’s say, working on making offsets work, so they are a little bit biased in favour of offsets. So it’s difficult to actually come up with a clear conclusion with the exception of the cases where there is corruption like what we discussed before.
One of the things that I’ve noticed in procurement in general in the EU over the last few years is a move towards trying to bring social clauses into procurement and here in the UK, especially in Scotland and Wales, the original governments have developed what they call community benefits, which in effect are not much different from offsets for general procurement. So, for example, the textbook example is okay, we want to build a school and we want god knows how many apprenticeships to be created and we want the local people to be employed in the actual building of the school. Irrespective of actually analysing if all these measures are legal under EU law or not, just looking at the idea and the principle, one of the risks we have is a) we increase the complexity of the procurement and b) as you highlighted we may fall into the same traps that most people think offsets are falling to, which is they may increase the cost of the main contract, the quality of the output of that offset is substandard and they actually facilitate corruption because you can route the money. Instead of making the money appear in the accounts of the politicians directly, you can route it via companies which magically are awarded the offset or awarded the work related with the offset. So is it the case that we are importing into general procurement a practice from defence procurement which is something that people usually don’t talk about?
Probably it’s unconscious: I don’t think that people are saying to themselves, oh yeah, let’s use these offset practices of defence procurement into public sector procurement. But indeed, you hear more and more over the recent years that we should buy local, that we should advantage “our” people, whoever “our” people is. But in your question you have raised one of the biggest problems of offsets because actually I think one of the biggest problems of offsets is not necessarily those costs increases and so on, but it’s how you monitor offsets. How do you check that offsets are actually being carried out? And if you look at defence procurement, the larger countries have departments that can deal with that and even then it’s very difficult to do. But if you start doing something similar for local procurement, let’s say, that a town council is requesting that the school, as you said, be built with a certain percentage of local labour, that sounds easy but in practice how do you actually check it? How do you actually define the value of this local labour? The local labour could be skilled labour, could be unskilled, so it’s actually very complicated. That’s something we see in defence procurement when we deal with offsets and actually I’m pretty sure that local contracting authorities or regional contracting authorities don’t actually have the resources in terms of knowledge and in terms of number of people to actually monitor that. So that’s one of the biggest issues with offset, I think.
I agree with you. Bearing in mind my practice, or my experience in practice to link with local councils in three different member states, there’s certainly a lack of resources and by resources I’m not talking only about capability but also I’m talking about people and time of the people that deal with procurement to actually monitor the main contract, let alone extra stuff that needs to be delivered for which probably there’s no penalty included, at least for now that we’re just designing the first examples of this kind of social clauses. And I suspect, and I remember a presentation I did at Procurement Week maybe two or three years ago, precisely about social clauses and calling them offsets in general procurement and one of my worries at the time was, and still is, that something like allocating apprenticeship to construction contract still makes a little bit of sense and it’s technically connected with the main contract and should be possible to monitor, if not actually given a financial value at least monitor if it’s happening or not. But what we’re creating is a condition that companies and the suppliers are going to become a lot more creative as time goes on and are just going to come up with ever more complex community benefits or social clauses like it’s happened for the offsets. I mean, if you look at the offsets nowadays in comparison with 40 years ago or so, they are more and more disconnected from the actual military procurement so it’s just no longer a question, for example, of ensuring that the submarines or the helicopters are built locally, it’s actually areas that have nothing to do with the main contract like ensuring that the textile industry, and this is a real example, the textile industry in that country is going to receive orders from the developed country that is selling the military equipment so this kind of stuff may well seep in or seep out into social considerations in general public procurement.
Well, it becomes more and more problematic because if we now go back to the legal issue, the more you move away from the subject matter of the contract, the less legal it is from an EU law point of view, and as I said in the defence sector we have that big exemption, Article 346 but that one as well can only be used if the measures taken have no impact on the competition in the market for civil products. So the more you move away from the subject matter of the contract, first of all the more difficult it becomes to justify from a legal point of view, but also the more difficult it becomes to monitor. If you’re buying a submarine, the people working in the procurement team for that submarine should know procurement law, should know submarines, should know shipyards but how are they going to be able to monitor the example you mentioned, the industrial return in the textile industry? So it becomes more and more complicated to monitor and to implement.
And why would they care? I mean, their job is making sure that the submarines or the helicopters are built to the specification. Whatever happens with the other contracts, it’s actually probably not even in their radar.
So, I think we’ve time for a couple of more questions, so let’s bring the discussion back to your book before we keep on going on a side track. I quite liked one of the chapters of your book in terms of the title that you adopted for it which is called ‘Matryoshka doll’ of legal relationships. What do you mean by this?
Actually it goes back to something I said a little bit before. People see collaborative defence procurement as one thing, one big entity, one big concept. If you look at the defence and security directive 2009/81 there is an exclusion there for collaborative defence procurement programmes. But actually if you look at a collaborative procurement programme, it looks a little bit like a Matryoshka doll. It looks like one doll but when you open it, the first thing you see is the law that applies to the decision of a participating state to participate in a specific programme. That’s a first doll. And then there’s a second doll which is the relationship between the participating states, and that’s as I said public international law. That’s a second doll. And then you’ll have the procurement law of the entity managing the programme, which is currently more and more an international organisation such as the European Defence Agency or OCCAR or a NATO organisation. So the procurement law that they apply, that is the third doll and then the fourth doll is the law applicable to the contract itself, to the interpretation and application of the contract. In domestic public procurement law it’s usually easy because the law defines which law is applicable to the execution of the contract. In collaborative programme, because there are many countries involved, it’s not that clear. Sometimes it’s English law, sometimes, well, I’ve been working on a programme where the working language is English, all the contracts are written in English, but none of the participating states is a native English-speaking state. So sometimes coming from a UK legal background, when I started attending those meetings, I was telling them “but what you’re writing there is wrong from a legal point of view, it doesn’t mean what you want it to say”. And they were like, “ah, okay, but we’ve been writing that for the last ten years so we cannot change it now otherwise it would seem as if we would be changing the meaning of what we meant to say”. I was like, “yeah, okay”. But so you have that Matryoshka doll of four legal relationships and actually when I give classes or lectures on the subject, I now come up with my little doll and I take the little bits of it one after the other. People usually remember that. And in addition it gives me the opportunity, instead of putting a big fighter aircraft of the cover of my book, to put four Matryoshka dolls on the picture on the cover of my book so that’s more original than most defence procurement books, let’s say it this way.
That explains the cover of the book because I looked at the book and said "why did he pick Matryoshka dolls to be on the cover?" But now it makes perfect sense because actually there’s an analogy there and there’s an allegory there about how they work within the field that you are writing about.
One final question. What about your future works? Do you want to do more research in this area or are you just going to close the chapter on researching defence procurement and just apply it?
Probably on collaborative defence procurement I think I’ve gone as far as I could. It might be worth coming back to it in a few years and see how things have been evolving. I know from my involvement with some of the international organisations like the European Defence Agency that steps are being taken to improve the way it is managed, so it would be worth taking a look back at it in a couple of years, let’s say. Now more generally on defence procurement, there are still lots of things to be done and the European Commission is currently reviewing the applicability and the effectiveness of the defence and security Directive 2009/81 so things are probably going to move in the next couple of years so that would be still worth investigating and anyway I’m dealing with day-to-day practice on defence procurement in the Belgian Armed Forces so I hear more and more things and I get more and more ideas on new books and new articles and those kinds of things.
Well, I think that’s a very good way to actually finish the interview on, so Baudouin thank you very much for your time and making yourself available and going through a number of hoops so I could actually be able to record a podcast.
Thank you for this opportunity, Pedro. That was a very nice, very interesting discussion.
You can find me at my blog, Telles.eu or on Twitter where I use two handles, @Detig for general discussion and @publicprocure for public procurement related topics. As ever, I am very grateful for the support of the British Academy Rising Star Engagement Awards which made possible this project.