One nation’s annual defence budgetary cycle might end with the calendar year while its neighbour’s starts earlier or later. As a result, several countries can be ready to launch a programme but others cannot do so until money is approved or available. This often leads to launch delays or a reduction in the number of participants in a given programme.
Another impediment to collaborative efforts is the use-it-or-lose-it pressure on a defence ministry (or any other ministry, for that matter) to spend any unused money by cycle’s end for fear of seeing its budget reduced the following year. This leads to unnecessary spending and hasty decision-making.
Whether the problem has been cyclical disparity or lack of funds, both play havoc with a defence ministry’s ability to forecast and plan for collaborative defence capability development. These two issues are about to be mitigated, however, by the European Defence Agency’s (EDA) Cooperative Financial Mechanism (CFM), which should get off the ground in early 2020.
“The Agency’s role is to promote and incentivise collaborative defence capability development in Europe and to help create the right conditions for that. The CFM adds a very powerful instrument to our toolbox,” said Jorge Domecq, EDA’s Chief Executive. “In future, mismatching budgetary cycles or provisional gaps in funding should no longer exclude Member States from participating in multinational programmes”.
So far, 11 EDA Member States have declared their intention to sign the CFM: Belgium, Bulgaria, Cyprus, France, Greece, Hungary, Lithuania, Netherlands, Portugal, Slovenia and Spain, with another five (Germany, Italy, Malta, Poland and Romania) expected to join in the coming months. Once all their national parliaments have ratified their participation, the CFM is expected to enter force during the first half of 2020.
First proposed by the Agency to its Member States in November 2016, the CFM has been designed to support any type of collaborative effort, whether research and technology/development or for a capability’s acquisition phase. It will have a unique structure, with two innovative sources of finance to enable the smooth launch of multination capability projects and programmes.
European Investment Bank
The first will be an unprecedented line of credit to be opened by the European Investment Bank (EIB), the EU’s infrastructure lending arm. Following calls from the European Council to step up its support to the defence sector, the EIB launched in December 2017 its ‘European Security Initiative’. Worth EUR 6 billion over three years, this credit line will provide co-financing of up to 50 percent for eligible national or collaborative R&D projects and defence programmes. Moreover, the EIB signed a Memorandum of Understanding with EDA in February 2018. This foresees that the Agency will support the bank by assessing defence-related projects, or sub-work packages of a given project, against the EIB’s lending policy. In other words, the Agency will provide advice and technical expertise to the bank to help it assess a project’s eligibility for EIB lending.
The EIB’s participation represents a sea-change in the bank’s lending mandate, which has traditionally steered it around any defence-related projects. But the bank’s new policy shift is a recognition by policy-makers of the urgent need to support dual-use technology development in Europe. (See EIB interview, page 37).
State-to-state lending
The CFM’s other pillar is all the more surprising for its ground-breaking nature. It will entail state-to-state lending – be it end-of-cycle budgetary resources or fresh money – between national Ministries of Defence for collaborative projects.
“This was a very sensitive thing to pull off, for several reasons,” said Fabio Liberti, EDA Policy Officer for Strategic Analysis. “First, we had to persuade national finance ministries to go along with the idea of potentially supporting partners in a way that is compatible with EU treaties and national budgetary legislations. The great novelty embedded within the CFM is the possibility for countries to use funding – either newly committed or unused year-end leftovers – in a multiannual way to support cooperation. Once a Member State decides to contribute to the CFM, its money can stay there from one year to the next without being pulled back into a country’s general treasury. That was a major political break-through.”
The second area of concern was to frame the CFM’s rules in such a way that its lending would not permanently subsidise one or more Member States’ participation in a programme or offer any bail-out sources of finance. Its operating principle is tide-over lending for launch and programme participation. That means loans will have to be repaid among the Member States and cannot substitute for spending elsewhere that a Member State would otherwise have to do anyway.
To further keep that principle on track, inter-state lending will only take place between a lender and borrower country where both are involved in the same collaborative defence project or programme. Also, a beneficiary CFM country will only be able to request the amount strictly necessary for the project or programme’s realisation, with the total sum of the support it receives not exceeding 70% of its contribution.
Individual bank accounts
Putting aside these lending intricacies, the way the CFM will function is fairly straightforward. Each participating defence ministry will open its own CFM bank account where it will decide how much to put there and when it wants to collaboratively lend to another Member State per the latter’s formal request for support (RfS).
The Agency will oversee all the accounts and pre-screen the funding requests to ensure they fall within the CFM’s scope. It will then carry out the inter-ministry transfers and subsequently monitor developments to ensure that each CFM country fulfils its RfS obligations. It will then report annually to its Steering Board about the CFM’s state-of-play from one year to the next.
If the Cooperative Financial Mechanism unfolds as planned, it should offer a trusted platform for inter-state support and outside lending from the EIB in a way that Europe has never before attempted. At the same time, as unused end-of-cycle budgetary amounts from national defence ministries start to accumulate in their CFM accounts, this will increasingly grease the wheels of collaborate programmes and thus begin filling Europe’s gaps in defence capability.
There are few situations that are truly win-win in any domain, but if the CFM works as planned it will be one.