Recent Trends in Finland’s Defence and Security Sector

Posted on

27 Jun

2024

Dittmar & Indrenius > Insight > Recent Trends in Finland’s Defence and Security Sector

In the rapidly evolving landscape of Finland’s defence and security sector, understanding regulatory requirements as well as the latest legal practices is crucial for both domestic and international businesses when navigating this complex field. This article provides a brief overview of certain aspects to be considered in connection with investments in the defence and security sectors. It discusses defence and security procurement, key legislation and recent legal precedents.

Investing in defence and security – certain key considerations

The technology sector in Finland includes a prominent group of early stage, scale-up and established companies that develop or produce technologies with dual-use elements. More traditional defence and security sector entities are considering whether and to what extent they should be investing in various R&D efforts, technologies and/or production capabilities. While the general consensus is on the side of recognising the importance of defence and security in the current global environment, the industry would welcome more direct messages from governments in terms of tangible demand. Nevertheless, investments in the defence and security sector are expected to increase.

Both the European Investment Bank1 and the Nordic Investment Bank2 have recently stepped up their support for the defence and security sector. The EIB’s Board of Directors has approved an updated definition of dual-use goods and infrastructure eligible for EIB Group financing. In practice, the EIB no longer requires that dual-use projects eligible for financing derive more than 50% of their expected revenues from civilian use.

The EIB Group will also update its rules for security and defence SME financing. This will open dedicated credit lines managed by European banks and other intermediaries for dual-use projects. The NIB’s Board of Directors has recently approved the reviewed Sustainability Policy for public consultation. The amendments to the policy allow the bank to offer financing for security and defence. As a result, the NIB can consider providing financing to dual-use equipment, projects, facilities, services, technology and other defence equipment. Weapons and ammunition are still excluded.

When making equity investments in the defence and security sector, whether in a form of, for example, minority investments (starting from a stake of 10%), joint ventures or acquisitions, the Finnish FDI regime must be considered. The Finnish FDI regime is not, per se, restrictive. Rather, it enables the government to monitor foreign direct and indirect investments via a notification procedure (the duration of which is a few months) and to restrict only if deemed necessary for the purposes of national interests. In the defence sector, all non-Finnish investors/acquirers fall within the scope of the regime, whereas in other sectors, such as the security sector, only non-EU/EFTA investors/acquirers are covered.

What is defence and security-related public procurement?

In general, defence procurement means the public procurement of defence-related equipment, work, goods or services and the procurement of services used specifically for military purposes. Security procurement, on the other hand, refers to the public procurement intended for security purposes and for which sensitive classified documents are processed to carry out such procurement.

In Finland, both are regulated by the Act on Public Procurement in the Fields of Defence and Security (“the PPFDS Act“)3 , based on the corresponding EU directive4 . The PPFDS Act mandates competitive tendering for defence and security procurements by public authorities and other contracting entities. The PPFDS Act applies, inter alia, to the Finnish Defence Forces, the National Emergency Supply Agency and to the National Police Board. Procurements involving essential national security interests, as outlined in Article 346 TFEU5 , are exempt from the PPFDS Act. In these situations, the procuring entity may generally determine the rules of the procurement based on its discretion.

The PPFDS Act applies to defence and security-related public procurements. If the public procurement is not related to defence or security, it is covered by the general Procurement Act6, even if the procuring entity operates in the field of defence or security. The application of these parallel rules has been discussed in a comprehensive guidance on defence procurement published by the Ministry of Defence in December 2023. The guidance covers general principles, procurement procedures and communication strategies, and it offers a valuable resource for market participants.

Unprecedented surge in appeals over defence and security procurements

A party may appeal public procurement decisions to the Market Court. In 2023, the Market Court received eight appeals concerning defence and security procurement. The number of appeals in 2023 was the same as in the preceding five years (2018–2022). The increasing trend in appeals may suggest increasing competition in the field. However, the increasing trend is not visible in the number of public tender procedures. Instead, the number of contract notices for defence and security procurements published during 2022–2023 was about 25% lower than before Russia’s attack against Ukraine. It is possible that in the current security environment more procurement contracts are being awarded without competitive tendering; for example, based on Article 346 TFEU.

In a recent landmark decision7, the Market Court emphasised the procuring entity’s discretion when the interests of national defence, state security or security of supply allow the procurement to be carried out without competitive tendering under Article 346 TFEU and national rules. The case that ended in favour of the Finnish Defence Forces concerned a joint procurement of assault rifles with Sweden, potentially extending into the 2050s with option periods. The appellant had argued, inter alia, that the contract in question could have been put to tender as had been done in similar situations in other EU countries. One key aspect from the security of supply perspective was that, unlike the appellant, the selected supplier (part of an international firearms group) had an arms factory in Finland.

Role of consultants and revolving door rules

Especially international companies operating in Finland may find it useful to engage local consultants to learn about the structure of public procuring entities and their ways of operating. This usually serves to benefit the public procuring entity as well in the form of better quality tenders. However, depending on the background of such consultants, various legal and compliance aspects must be considered.

For example, under the current Finnish revolving door rules, a government official may, based on a separate agreement, be prohibited from accepting certain employment roles or taking up certain business activities for a maximum period of twelve months after the termination of official government duty.

Even if such a waiting period agreement was not in place or the waiting period has passed, public procuring entities may forbid third party commercial agents, such as consultants, from participating in negotiations on procurement in situations where, because of their previous official status or for any other reason, there is reasonable doubt as to whether the equal treatment of tenderers is compromised. Such a situation arises, for example, where a person has had access to information relating to the project or procurement in a previous capacity and has been in a position where they have effectively managed or given direction in relation to the project or procurement or have previously been involved in the preparation of the procurement.

Companies operating in the defence and security sector typically have strict compliance policies and procedures in place. Such policies and procedures, for their part, mitigate the risk of undermining confidence in the independence and impartiality of the tendering procedure or the equal treatment of tenderers. However, given the complexity and the nuances of the applicable legislation and practice, it is always advisable to obtain local legal advice when operating in Finland.

 

1EIB Board of Directors steps up support for Europe’s security and defence industry and approves €4.5 billion in other financing
2NIB reviews Sustainability Policy to allow security and resilience investments – Nordic Investment Bank
3The Act on Public Procurement in the Fields of Defence and Security (Available in Finnish).
4Directive 2009/81/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC.
5The Treaty on the Functioning of the European Union.
6Act on Public Procurement and Concession Contracts (Available in Finnish).
7MAO 284/2024

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