Once the new government has settled in, Germany will be spending a lot of money in the years to come. A significant portion of the pre-agreed investments will go to the defence sector. Such state-directed investments will naturally have a significant impact on the competitive landscape in Germany and beyond. The German Monopolies Commission has shared its thoughts on how defence spending can happen in a pro-competitive manner – at a time when the industry has increasingly become the focus of antitrust regulators. Here is an overview:
Shortly after the elections, but even before the new Bundestag convened for the first time, the designated coalition of the Christian Democratic Union (CDU) and the Social Democratic Party (SPD) agreed on a special fund to boost defence spending, freed from the so-called debt brake, essentially allowing the government to spend substantial amounts in the defence sector. As the EU (and other Member States) has announced similar plans, it is clear that companies active in this sector can expect to receive massive orders in the near and mid-term future.
Against this backdrop, the Monopolies Commission, an independent expert committee that advises the German government and the legislator on competition policy, released a statement titled “Why competition matters for Defence Spending”. In its statement, the Monopolies Commission first identifies key issues of large state-directed investments and explains key requirements for a pro-competitive design of defence spending before providing its ideas for safeguarding competition and innovation in the sector.
Tried and tested vs. innovative?
When it comes to large procurement projects, one of the key challenges, according to the Monopolies Commission, has been excessive bureaucracy and cost overruns. However, the Monopolies Commission also expresses concerns that, in the past, very large companies often had advantages in securing government contracts, making it difficult for smaller, mid-sized companies and start-ups to enter the market and compete on their merits. This, in turn, can lead to less innovation and market diversity. With the government as the key spender, these risks can become even higher and lead to consolidated market power. Functioning competition can help drive costs down and keep dominant players in check.
At the same time, the Monopolies Commission acknowledges that the current situation also provides a historical opportunity. According to its statements, a “truly pro-competitive approach” to defence spending requires three elements:
- European approach: Greater European coordination combined with stronger European technology is required to enhance efficiency and competitiveness while preserving national security interests.
- Harmonization, simplification, and acceleration: Europe’s legal and technological framework needs to be streamlined so that procurement rules and structures are simplified.
- Balance of urgency and innovation: While immediate defence readiness must be the top priority, the focus should also be on new weapons and defence technologies.
These “requirements” are accompanied by more concrete ideas to safeguard competition and innovation in defence spending, such as creating competition at the European level, enhancing the participation of start-ups and SMEs, fostering innovation, and harmonizing the EU-wide procurement framework with fast-track mechanisms that allow quick decision-making in defence procurement.
The regulators’ view
The report also comes at a time when regulators increasingly have to deal with defence companies in various matters related to antitrust. Only one and a half years ago, the European Commission fined, for the first time, a defence company for its involvement in a cartel concerning the sale of military hand grenades. And the German Federal Cartel Office (FCO) published three press releases this year alone relating to acquisitions and joint ventures in the defence sector.
Such press releases are not standard in merger control proceedings but are generally only used if the cases are of general interest or if the FCO wants to share its position on a certain matter with the public. In these cases, the FCO emphasized that due to the geopolitical situation, there is considerable movement in the defence industry, leading to more joint ventures and loose cooperations. However, the regulator also makes it clear that it does not give a carte blanche for all sorts of cooperations or joint ventures for national security reasons. Companies involved in these projects still need to, e.g., demonstrate that their activities are largely complementary or that they are unable to carry out a certain project on their own.
A new focus area?
In sum, it will be interesting to see how the government’s spending will affect the industry and what kind of consolidation will take place. At the same time, regulators have indicated that they will continue to closely observe and potentially scrutinize any developments in this sector. As such, it would not be too surprising if the defence industry is named as one of the focus areas of antitrust regulators in the near future.
Antitrustpolitics.com 