(1)

Russia’s war of aggression against Ukraine has put the European defence industry and defence equipment market to the test and exposed a number of flaws which undermine their ability to satisfy in the requisite, secure and timely manner the Member States’ urgent needs for defence products and systems, such as ammunition and missiles, considering the high consumption rate of those products and systems during a high-intensity conflict.

(2)

Since 24 February 2022 the Union and its Member States have been steadily stepping up their efforts to help meet Ukraine’s pressing defence needs. Furthermore, in that context, confronted with growing instability, strategic competition and security threats, the Union Heads of State or Government, meeting in Versailles on 11 March 2022, decided to take more responsibility for the Union’s own security and take further decisive steps towards building European sovereignty. They committed to ‘bolster European defence capabilities’ and agreed to increase defence expenditure, to step up cooperation through joint projects and common procurement of defence capabilities, to close shortfalls, to boost innovation and to strengthen and develop the Union defence industry. On 21 March 2022, the ‘Strategic Compass for a stronger Union security and defence in the next decade’ (the ‘Strategic Compass’) was approved by the Council, and subsequently endorsed by the European Council on 24 March 2022. The Strategic Compass stresses the need to increase defence spending and invest more in capabilities, both at Union and national levels.

(3)

The Commission and the High Representative of the Union for Foreign Affairs and Security Policy presented a Joint Communication on the Defence Investment Gaps Analysis and Way Forward on 18 May 2022 highlighting the existence, within the Union, of defence financial, industrial and capability gaps. On 19 July 2022 the Commission presented a proposal for a Regulation of the European Parliament and of the Council on establishing the European defence industry Reinforcement through common Procurement Act (EDIRPA), aimed at supporting collaboration between Member States in the procurement phase to fill the most urgent and critical gaps, especially those created by the response to Russia’s war of aggression against Ukraine, in a collaborative way. EDIRPA will contribute to the reinforcement of the common defence procurement and, through the associated Union financing, to the strengthening of Union defence industrial capacities and to the adaptation of the Union defence industry to structural market changes resulting from increased demand due to new challenges, such as the return of high-intensity conflict.

(4)

In light of the situation in Ukraine and of its pressing defence needs, in particular for ammunition, on 20 March 2023 the Council agreed on a three-track approach, aimed at providing one million rounds of artillery ammunition for Ukraine in a joint effort within the next 12 months. It agreed to urgently deliver ground-to-ground and artillery ammunition to Ukraine and, if requested, missiles, from existing stocks or by means of reprioritisation of existing orders. It further called on Member States to jointly procure ammunition and, if requested, missiles from the European defence industry (and Norway) in the context of an existing European Defence Agency (EDA) project or through complementary Member States-led acquisition projects, in order to refill their stocks while enabling the continuation of support to Ukraine. To support those efforts, the Council agreed to mobilise appropriate funding including through the European Peace Facility (EPF). The Council also tasked the Commission with presenting concrete proposals to urgently support the ramp-up of manufacturing capacities of the European defence industry, secure supply chains, facilitate efficient procurement procedures, address shortfalls in production capacities and promote investments, including, where appropriate, by mobilising the Union budget. Such promotion of investments is essential in order to ensure that the Union’s own security needs are adequately met at all times and that the Union defence industry and internal market are up to the current challenges. The three interlinked tracks need to be pursued in parallel and in a coordinated way. In order to ensure an adequate implementation of the three tracks, regular meetings at the level of National Armament Directors with the Defence Joint Procurement Task Force (consisting of the representatives of the Commission, the European External Action Service (EEAS) and the EDA) will also be organised to assess the needs and industrial capabilities as well as to ensure the necessary close coordination.

(5)

On 13 April 2023, the Council adopted an assistance measure under the EPF worth EUR 1 billion to support the Ukrainian Armed Forces, allowing for the reimbursement to Member States of the costs of ground-to-ground and artillery ammunition, and possibly missiles, donated to Ukraine from existing stocks or by reprioritisation of existing orders during the period from 9 February to 31 May 2023. Regarding joint procurement, thus far 24 Member States together with Norway have signed the EDA’s Project Arrangement for the collaborative procurement of ammunition.

(6)

Joint efforts to enable Member States to replenish their depleted stocks and to support Ukraine can only be effective if the Union’s supply side can deliver the required defence products on time. But, with stocks rapidly dwindling, with production in the Union almost at maximum capacity from Member States’ or third countries’ orders, and with prices already spiralling, additional Union industrial policy measures are necessary to ensure a rapid ramp-up of manufacturing capacities.

(7)

As highlighted by the work of the Defence Joint Procurement Task Force on coordinating very short-term defence procurement needs and engaging with Member States and with Union defence manufacturers to support common procurement to replenish stocks, particularly in light of the support provided to Ukraine, the Union industry has manufacturing capacities in the area of ground-to-ground and artillery ammunition as well as missiles (‘relevant defence products’). However, production capacities within the Union defence industry sector have been tailored for times when the challenges were different from those currently posed to the Union. Supply flows have been adapted on the basis of a more modest demand, with a minimal level of stocks and globally diversified suppliers to reduce costs, exposing the Union defence industry sector to dependencies. As a consequence, in this context, the current manufacturing capacity and the existing supply and value chains do not allow for a secure and timely delivery of defence products necessary to meet the Member States’ security needs and for the continued support of Ukrainian needs, creating tensions on the market for the relevant defence products, and a risk of a crowding-out effect. Additional intervention at Union level is therefore necessary.

(8)

In accordance with Article 173(3) of the Treaty on the Functioning of the European Union (TFEU), the Union is to contribute to the achievement of the objective of speeding up the adjustment of the industry to structural changes. Therefore, it appears appropriate to support Union industry to increase its volume of production, reduce its lead production time and address potential bottlenecks or factors that could delay or impede timely availability and supply of relevant defence products.

(9)

The measures taken at Union level should aim at reinforcing the competitiveness and resilience of the European Defence Technological and Industrial Base (EDTIB) in the field of ammunition and missiles, to allow its urgent adaptation to structural change.

(10)

To that end, an instrument for the financial support of the industry’s reinforcement throughout the supply and value chains related to the production of relevant defence products in the Union (the ‘Instrument’) should be established.

(11)

The specific structure, eligibility conditions and criteria laid down in this Regulation are particular to this short-term Instrument and are determined by specific circumstances and the current emergency situation.

(12)

The Instrument will be coherent with existing collaborative Union defence-related initiatives such as in the European Defence Fund, the proposed EDIRPA, as well as the EPF, and will generate synergies with other Union programmes. The Instrument is fully coherent with the ambition of the Strategic Compass.

(13)

Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council (3) (the ‘Financial Regulation’) should apply to the Instrument, unless otherwise specified.

(14)

In accordance with Article 193(2) of the Financial Regulation, a grant may be awarded for an action which has already begun, provided that the applicant can demonstrate the need for starting the action prior to signature of the grant agreement. However, costs incurred prior to the date of submission of the grant application are not eligible, except in duly justified exceptional cases. In order to address the call by the Council of 20 March 2023 to speed up the delivery of relevant defence products, in the financing decision it should be possible to provide for financial contributions in relation to actions that cover a period starting from that date.

(15)

This Regulation lays down a financial envelope for the entire duration of the Instrument which is to constitute the prime reference amount, within the meaning of point 18 of the Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources (4), for the European Parliament and for the Council during the annual budgetary procedure.

(16)

The possibilities provided for in Article 73(4) of Regulation (EU) 2021/1060 of the European Parliament and of the Council (5) could be applied provided that the project complies with the rules set out in that Regulation and the scope of the European Regional Development Fund and the European Social Fund Plus as set out in Regulations (EU) 2021/1058 (6) and (EU) 2021/1057 (7) of the European Parliament and of the Council, respectively. In line with Article 24 of Regulation (EU) 2021/1060, the Commission is to assess the amended programmes submitted by the Member State and make observations within two months of the submission of the amended programme. Given the urgency of the situation, the Commission should strive to conclude the assessment of the amended national programmes without undue delay.

(17)

When proposing amended or new recovery and resilience plans, in accordance with Article 21 of Regulation (EU) 2021/241 of the European Parliament and of the Council (8), Member States should be able to propose measures which also contribute to the objectives of the Instrument, in line with the purposes and requirements laid down by Council Decision (EU, Euratom) 2020/2053 (9), Council Regulation (EU) 2020/2094 (10) and Regulation (EU) 2021/241. To that end, Member States should consider in particular measures linked to proposals submitted to a call for proposals under the Instrument, which were awarded a Seal of Excellence in accordance with the Instrument.

(18)

In accordance with the Financial Regulation, Regulation (EU, Euratom) No 883/2013 of the European Parliament and of the Council (11) and Council Regulations (EC, Euratom)No 2988/95 (12), (Euratom, EC) No 2185/96 (13) and (EU) 2017/1939 (14), the financial interests of the Union are to be protected by means of proportionate measures, including measures relating to the prevention, detection, correction and investigation of irregularities, including fraud, to the recovery of funds lost, wrongly paid or incorrectly used, and, where appropriate, to the imposition of administrative penalties. In particular, in accordance with Regulations (Euratom, EC) No 2185/96 and (EU, Euratom) No 883/2013, the European Anti-Fraud Office (OLAF) has the power to carry out administrative investigations, including on-the-spot checks and inspections, with a view to establishing whether there has been fraud, corruption or any other illegal activity affecting the financial interests of the Union. The European Public Prosecutor’s Office (EPPO) is empowered, in accordance with Regulation (EU) 2017/1939, to investigate and prosecute criminal offences affecting the financial interests of the Union as provided for in Directive (EU) 2017/1371 of the European Parliament and of the Council (15). In accordance with the Financial Regulation, any person or entity receiving Union funds is to cooperate fully in the protection of the financial interests of the Union, to grant the necessary rights and access to the Commission, OLAF, the Court of Auditors and, in respect of those Member States participating in enhanced cooperation pursuant to Regulation (EU) 2017/1939, the EPPO, and to ensure that any third parties involved in the implementation of Union funds grant equivalent rights.

(19)

Members of the European Free Trade Association which are members of the European Economic Area (EEA) should be able to participate in the Instrument as associated countries in the framework of the cooperation established under the Agreement on the European Economic Area (16), which provides for the implementation of their participation in Union programmes on the basis of a decision adopted under that Agreement. This Regulation should require those third countries to grant the necessary rights and access required for the authorising officer responsible, OLAF and the Court of Auditors to comprehensively exercise their respective competences.

(20)

Given the specificities of the defence industry, where demand comes almost exclusively from Member States and associated countries, which also control all acquisition of defence-related products and technologies, including exports, the functioning of the defence industry sector does not follow the conventional rules and business models that govern more traditional markets. The industry does not therefore engage in substantial self-funded industrial investments but only does so as a consequence of firm orders. While firm orders from Member States are a precondition for any investment, the Commission can intervene by de-risking industrial investments via grants and loans allowing a faster adaptation to ongoing structural market change. In the current emergency context, Union support should cover up to 50 % of direct eligible costs in order to enable beneficiaries to implement actions as soon as possible, to de-risk their investment and therefore to speed up the availability of relevant defence products.

(21)

The Instrument should provide financial support, via means provided for in the Financial Regulation, to actions contributing to the timely availability and supply of relevant defence products such as industrial coordination and networking activities, access to finance for undertakings involved in the manufacturing of relevant defence products, reservation of capacities, industrial processes of reconditioning of expired products, expansion, optimisation, modernisation, upgrading or repurposing of existing, or the establishment of new, production capacities in that field as well as the training of personnel.

(22)

As the Instrument aims to enhance the competitiveness and efficiency of the Union defence industry, only entities, whether public or privately owned, which are established and have their executive management structures in the Union or in associated countries should be eligible for support. Those entities should either not be subject to control by a non-associated third country or by a non-associated third country entity or, alternatively, they should have been subject to screening within the meaning of Regulation (EU) 2019/452 of the European Parliament and of the Council (17) and, where necessary, to mitigation measures, taking into account the objectives referred to in Article 4 of this Regulation. An entity which is established in a non-associated third country or an entity which is established in the Union or in an associated country, but which has its executive management structures in a non-associated third country should not be eligible to be a recipient involved in an action.

(23)

Entities established in the Union or in an associated country that are controlled by a non-associated third country or a non-associated third-country entity and that have not been subject to screening within the meaning of Regulation (EU) 2019/452 and, where necessary, to mitigation measures, should only be eligible to be recipients provided that 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 EDTIB, are fulfilled. The participation of such entities should not contravene the objectives of the Instrument. In that context, control should be understood to be the ability to exercise a decisive influence on an entity directly, or indirectly through one or more intermediate entities. Applicants 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 in that respect. In view of the urgency of the situation stemming from the existing ammunition supply crisis, the Instrument should take into account existing supply chains.

(24)

Infrastructure, facilities, assets and resources of the recipients involved in an action supported under the Instrument should be located on the territory of a Member State or of an associated country for the entire duration of the action.

(25)

The Instrument should not financially support the ramp-up of production capacities for relevant defence products that are subject to a restriction by a non-associated third country or a non-associated third country entity that limits the Member States’ ability to use those relevant defence products. The recipient should aim to ensure that the action funded by the Instrument will allow for the delivery of outputs to Ukraine.

(26)

Pursuant to Article 85 of Council Decision (EU) 2021/1764 (18), natural persons and bodies and institutions established in overseas countries and territories (OCTs) are eligible for funding subject to the rules and objectives of the Instrument and possible arrangements applicable to the Member State to which the relevant OCT is linked.

(27)

When assessing proposals submitted by applicants, the Commission should pay particular attention to their contribution to the objectives of the Instrument. The proposals should be assessed, in particular, against their contribution to the increase, ramp-up, reservation or modernisation of manufacturing capacities, as well as the reskilling and upskilling of the related workforce. They should also be assessed against their contribution to the reduction of the lead production time of relevant defence products, including through order reprioritisation mechanisms, to the identification and elimination of bottlenecks along their supply chains as well as to the development of the resilience of those supply chains through the development and the operationalisation of cross-border cooperation of undertakings, in particular, to a significant extent, small and medium-sized enterprises (SMEs) and mid-cap companies (mid-caps) operating in the supply chains concerned.

(28)

When designing, awarding and implementing Union financial support, the Commission should pay particular attention to ensuring that such support does not adversely affect the conditions of competition in the internal market.

(29)

Furthermore, the crisis resulting from Russia’s war of aggression against Ukraine has not only demonstrated deficiencies in the Union’s defence industrial sector, but has also posed challenges to the functioning of the internal market for defence products. Indeed, the current geopolitical context entails a significant increase in the demand that affects the functioning of the internal market for the production and sale of relevant defence products and of their components in the Union. While certain Member States have taken or are likely to take measures to preserve their own stocks as a matter of national security, others are faced with difficulties of access to the goods needed to manufacture or acquire the relevant defence products. Sometimes, difficulties in accessing one raw material or a specific component hamper entire production chains. To ensure the functioning of the internal market, it is necessary to establish, in a coordinated way, harmonised rules for increasing the security of supply of relevant defence products. Those measures should include an acceleration of the permit-granting process and facilitation of procurement procedures. Those measures should be based on Article 114 TFEU.

(30)

In light of the importance of ensuring the security of supply of relevant defence products, Member States should ensure that administrative applications related to the planning, construction and operation of production facilities, transfer of inputs within the Union, as well as the qualification and certification of relevant end products are processed in an efficient and timely manner.

(31)

To pursue the general public policy objective of security, it is necessary that production facilities related to the production of relevant defence products are set up as quickly as possible, while keeping the administrative burden to a minimum. For that reason, Member States should treat applications related to the planning, construction and operation of plants and installations for the production of relevant defence products in the most rapid manner possible. Such applications should be given priority when balancing legal interests in the individual case.

(32)

In view of the objective of this Regulation, and of the emergency situation and the exceptional context of its adoption, Member States should consider using defence-related exemptions under national and applicable Union law, on a case-by-case basis, if they deem that the use of such exemptions would facilitate the achievement of that objective. That could in particular apply to Union law concerning environmental, health and safety issues, which is indispensable to improving the protection of human health and the environment, as well as to achieving a sustainable and safe development. However, the implementation of that law could also produce regulatory barriers hampering the Union defence industry’s potential to ramp up the production and deliveries of relevant defence products. It is a collective responsibility for the Union and its Member States to urgently look into any action they could take to mitigate possible obstacles. Any such action, whether at Union, regional, or national level, should not compromise the environment, health and safety.

(33)

Directive 2009/81/EC of the European Parliament and of the Council (19) aims at harmonising procurement procedures for the award of public contracts in the field of defence and security thus enabling the security requirements of Member States and the obligations arising from the TFEU to be met. That Directive contains, in particular, specific provisions governing situations of urgency resulting from a crisis, in particular shortened periods for the receipt of tenders and the possibility to use the negotiated procedure without prior publication of a contract notice. However, the extreme urgency caused by the current ammunition supply crisis could be incompatible even with those provisions in cases where two or more Member States intend to engage in a common procurement. In some cases, the only solution that ensures the security interests of those Member States is to open an existing framework agreement to contracting authorities/entities of Member States that were not originally party to it, even though that possibility had not been provided for in the original framework agreement.

(34)

In accordance with the case law of the Court of Justice of the European Union, modifications to a public contract are to be strictly limited to what is absolutely necessary in the circumstances, while complying to the maximum extent possible with the principles of non-discrimination, transparency and proportionality. In that regard, it should be possible to derogate from Directive 2009/81/EC by increasing the quantities provided for in a framework agreement while opening it to contracting authorities/entities of other Member States. With respect to those additional quantities, those contracting authorities/entities should enjoy the same conditions as the original contracting authority/entity that concluded the original framework agreement. In such cases, the original contracting authority/entity should also allow any economic operator who fulfils the contracting authority’s/entity’s conditions initially laid down in the procurement procedure for the framework agreement, including requirements for qualitative selections as referred to in Articles 39 to 46 of Directive 2009/81/EC, to join that framework agreement. In addition, appropriate transparency measures should be taken to ensure that all potentially interested parties are informed. In order to limit the effects of those modifications on the smooth functioning of the internal market and to prevent disproportionate distortions of competition, it should only be possible to conclude such modifications of framework agreements until 30 June 2025.

(35)

In order to be competitive, innovative and resilient, as well as to be able to ramp up its production capacities, the EDTIB needs to access both public and private financing. As provided in the communication of the Commission of 15 February 2022 entitled ‘Commission contribution to European defence’, Union initiatives on sustainable finance remain consistent with the Union’s efforts to facilitate the European defence industry’s sufficient access to finance and investment. In that context, the Union’s sustainable finance framework does not prevent investment in defence-related activities. The Union defence industry is a crucial contributor to the resilience and the security of the Union, and therefore to peace and social sustainability. Within Union initiatives on sustainable finance policies, controversial weapons subject to international conventions prohibiting their development, production, stockpiling, use, transfer and delivery, and signed by Member States, are deemed incompatible with the requirements of social sustainability. The Union defence industry sector is subject to close regulatory scrutiny implemented by Member States for the transfer and export of military and dual-use items. In that perspective, a commitment of national and European financial actors - such as national promotional banks and institutions - to support the European defence industry, would send a strong signal to the private sector. While pursuing in full its other economic development and public policy financing missions, including the twin green and digital transitions and in line with Article 309 TFEU as well as its statute, the European Investment Bank should enhance its support to the European defence industry and joint procurement beyond its ongoing support for dual use, where such investments would clearly serve to implement the Strategic Compass priorities.

(36)

Undertakings in the value chains of relevant defence products should have access to debt financing in order to speed up investments needed to increase manufacturing capacities. The Instrument should facilitate access to finance for Union undertakings in the ammunition and missile sector. This Regulation should in particular ensure that those undertakings are granted the same conditions offered to other undertakings, taking charge of any additional cost arising specifically for the defence sector.

(37)

The Commission should be able to set up a dedicated facility as part of the investment facilitation activities to be referred to as the ‘Ramp-up Fund’. The Ramp-up Fund should be implemented under indirect management. The Commission should explore in that regard the most appropriate way to leverage the Union budget to unlock public and private investment in support of the rapid ramp-up sought, for instance through a blending facility, including under the InvestEU Fund established by Regulation (EU) 2021/523 of the European Parliament and Council (20), in close cooperation with its implementing partners. The Ramp-up Fund activities should support the increase of manufacturing capacities in the ammunition and missiles sector by providing opportunities for increased availability of funds to companies across the value chains.

(38)

In order to ensure uniform conditions for the implementation of this Regulation, implementing powers should be conferred on the Commission as regards the adoption of the work programme and the award of 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 (21).

(39)

Since the objective of this Regulation, namely to respond to the impact of the security crisis, cannot be sufficiently achieved by the Member States but can rather, by reason of the scale and effects of the proposed action, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 TEU. In accordance with the principle of proportionality as set out in that Article, this Regulation does not go beyond what is necessary to achieve that objective.

(40)

This Regulation should apply without prejudice to Union competition rules, in particular Articles 101 to 109 TFEU and the legal acts that give effect to those Articles.

(41)

In accordance with Article 41(2) TEU, operating expenditure arising from Chapter 2 of Title V TEU is to be charged to the Union budget, except for such expenditure arising from operations having military or defence implications.

(42)

Pursuant to paragraphs 22 and 23 of the Interinstitutional Agreement of 13 April 2016 on Better Law-Making (22), this Regulation should be evaluated on the basis of information collected in accordance with specific monitoring requirements, while avoiding overregulation and administrative burdens, in particular on Member States. Where appropriate, such requirements should include measurable indicators as a basis for evaluating the effects of this Regulation on the ground. The Commission should carry out an evaluation of this Regulation no later than 30 June 2024, including with a view to submitting proposals for amendments to this Regulation, where appropriate.

(43)

In light of the imminent danger to the security of supply brought about by Russia’s war of aggression against Ukraine, this Regulation should enter into force the on the day following that of its publication in the Official Journal of the European Union.

(44)

This Regulation should apply without prejudice to the specific character of the security and defence policy of certain Member States,