The Foreign Subsidies Regulation in public procurement – (not just) another tool in the toolbox - up-date

Introduction

In a noble attempt to address distortions caused by foreign subsidies to the detriment of fair competition, the EU has introduced the Foreign Subsidies Regulation (‘FSR’), which will take full effect on 12 October 2023. The FSR enables the European Commission to review financial contributions obtained from non-EU funding that may provide undertakings with a competitive edge in public tender procedures over other tenderers, and, in the event of actual or potential distortions in the internal market due to that advantage, to address these distortions. The Commission's enthusiasm for this initiative has proven to contrast sharply with the overwhelmingly negative reception by industry and other stakeholders, especially once the (scope of) practical implications became clear.

Many concerns voiced (quite loudly) strike us as justified. In the context of public tenders, the FSR creates a myriad of additional filing and notification obligations when undertakings that are (equally) active outside the EU aim to participate in large tenders. In order to comply with these obligations, the FSR imposes requirements that require monitoring of financial contributions and gathering (and interpreting) of information in an unprecedented way, resulting in an complex and continuous administrative ordeal. In our original post, we inserted the template of the detailed list undertakings needed to complete, which was illustrative of the amount of red tape involved.

The European Commission has not been insensitive to these concerns and has simplified the reporting requirements. On 10 July 2023 these requirements were published in the final version of the Implementing Regulation.

This provides us with an opportunity to provide you with a latest update.

A framework with the European Commission at its centre

The European Commission is entrusted with assessing whether financial contributions could cause distortions and to evaluate whether and which redress measures may be appropriate. The FSR provides a number of examples of subsidies that are likely to distort the internal market, such as unlimited debt or liability guarantees or subsidies granted to ailing undertakings. However, the Commission's assessment should occur on a case-by-case basis, e.g. taking into account the absolute or relative size of the contribution (as compared to the value of a public contract), what contributions may be earmarked for (OpEx contributions usually having a more distortive effect) and to what extent the market in question is saturated in terms of activity. In addition, positive effects on the internal market, e.g. in light of policy objectives or what is on offer in the internal market, may be taken into consideration.

The European Commission can make such assessments either following a mandatory notification or on its own initiative. Somewhat similar to State aid cases, the European Commission will conduct its review in two steps; after a preliminary review of the case, an in-depth investigation may ensue. If it finds, upon balancing the effects of the financial contribution on the internal market, that negative effects prevail, the Commission can impose measures. These measures may include accepting specific commitments from undertakings of a behavioural or structural nature, with potential far-reaching consequences (such as divestment of certain assets or refraining from investments or a repayment of subsidies) and imposing, where considered necessary by the European Commission, (periodic) reporting obligations.

Impact on undertakings

Pursuant to the FSR a public tender should be notified if:

• a public contract's estimated value equals or exceeds 250 million euros or is divided in lots equal to or exceeding 125 million euros; and
• tenderers (including subsidiaries without commercial autonomy, holding companies or main contractors and suppliers) have been granted aggregate financial contributions of at least 4 million euro per non-EU country in the last three years.

A duty to notify is incumbent upon tenderers, main subcontractors, and main suppliers (with some limited exceptions).

Compared to the draft Implementing Regulation the extent of (detailed) information that undertakings need to provide has been reduced:

• parties need to provide more detailed information on financial contributions equal to or in excess of EUR 1 million in the three years prior to the notification, insofar as they fall within the scope of the categories listed in the FSR (e. the categories which are amongst the most likely to distort the internal market);
• if contributions do not fall within the scope of the aforementioned listed categories, they only need to be reported if a contribution granted by a third country in the three years prior to notification equals or exceeds and if E the estimated aggregate amount of all financial contributions per country granted in the three years prior to the notification amounts to at least EUR 4 million;
• no information needs to be provided about g. the provision or purchase of goods or services at market terms in the ordinary course of business are exempted
• when the estimated value of the public contract equals or exceeds 250 million euros, but tenderers have not been granted aggregate financial contributions of at least 4 million euro per non-EU country in the last three years, the tenderer does not need to notify, but must still submit a declaration confirming that the parties have not received foreign financial contributions notifiable under the FSR. Parties no longer need to provide a list of the contributions in case of such declaration.

Although the extent of reporting obligations for undertakings was reduced considerably in the final and adopted version of the Implementing Regulation, the red tape incumbent upon undertakings should not be underestimated, if only because undertakings still need to collect all relevant information to calculate whether the threshold for notification is met.

Impact on contracting authorities and the public procurement process

Contracting authorities must send notifications and declarations to the European Commission for review. If, upon inquiring further with undertakings, such notifications or declarations are not submitted, the contracting authority must declare irregular any request to participate or a bid made. Likewise, the European Commission may declare a tender irregular if the undertaking does not complete the notification, in spite of requests made. When contracting authorities assess whether tenders are abnormally low, they must contact the European Commission if this assessment is initiated on suspicions indicating the possible presence of foreign subsidies. The latter will then decide whether the tender is unduly advantageous and may impose measures. 

Though the European Commission's preliminary review in principle must be carried out within 20 working days of receipt of the notification, the Commission has no less than 110 working days to adopt a decision pursuant to a complete notification. A slightly adapted procedure has been foreseen in multi-stage tender procedures. Although the European legislature pays lip service to the need to limit administrative burdens, in essence by only imposing obligations on undertakings aiming to conclude sizeable public contracts, it may still develop policies to investigate ex ante certain other bids and it may even assess concluded contracts.

Although during preliminary reviews and in-depth investigations, the public procurement procedure may continue, the contract cannot be awarded until the European Commission terminates its review or until the applicable time limit has passed.

Enforcement

In conducting its investigations, the European Commission is granted a wide range of inspection powers (e.g. entering any premises, examining any business records, interviewing staff or other representatives). Moreover, the European Commission may impose hefty fines on undertakings that provide incomplete, incorrect, or misleading information, or otherwise fail to cooperate with the European Commission's investigation.

Whereas the fines thus imposed cannot exceed 1% of the aggregate turnover in the preceding financial year, periodic penalty payments may reach up to 5% of the average daily aggregate turnover. In the event of non-compliance with (interim) decisions or with commitments made, the fines may be even higher (up to 10% of the aggregate turnover). Although the European Commission must consider the nature, gravity and duration of infringements, it is quite evident that the risks incurred by undertakings are sizeable.

Aside from that, the FSR may be enforced by courts adjudicating tender disputes, e.g. by preliminarily referring questions to the European Court of Justice.

First assessment

The FSR aims to apply a balanced approach to a whole range of subsidies by third countries. Moreover, the fact that the foreign subsidies may unduly impact the operations of tenders, is beyond reasonable dispute.

However, by granting far reaching (and exclusive) powers to the European Commission, which will need to review (large) public procurement procedures, a lot of new red tape is being created which may be difficult to work with in practice. Not to mention the fact that current resources are far from sufficient to (timely) provide the necessary people to review and monitor notifications. Even more, if multiple parties are involved (e.g. contracting party, main supplier, main subcontractor,…) the necessary coordination for the collection of information will add to the administrative burden, especially when since certain information qualifies as confidential or secret for one or more parties involved. The Implementing Regulation now foresees that sensitive information can be submitted separately; and each party is responsible for the correctness of its the information it provides itself.

Moreover, companies should also be aware that not all type of public procurement procedures are subject (to a similar extent) to the FSR. Companies should be aware that not any type of award procedure qualifies as a 'public procurement procedure' falling within the scope of the FSR. Moreover, even though certain types of public procurement procedures may be exempt from an automatic obligation to notify (e.g. defense procurement), such procedures may remain subject to an ex officio examination by the European Commission.

General advice

Since, in spite of vigorous lobbying and protest, the FSR has now been adopted, undertakings aiming to participate in large (infrastructure) projects should start working internally to monitor and gather the information related to foreign financial contributions so that it may be shared in due time.

The FSR entered into force on 12 July 2023; the date as of which the notification requirements will apply (12 October 2023) is approaching quickly. Consequently, companies should have started to prepare. To prepare, it is advisable to assess which parts of the company may have received any financial contributions outside the EU. Also, it would be advisable to design and put in place monitoring and compliance mechanisms to track future eligible financial contributions. 

As for contracting authorities, they may revisit the procedures adopted to procure their goods, services and works in excess of the threshold amounts. Since there will be a prohibition to award such contracts prior to the European Commission having finalised its review, it may be useful to restructure and improve the tendering process with the new time frames in mind.

All in all, for large public procurement projects (often infrastructure projects), both contracting authorities and undertakings will face a substantial increase in workload when organising or participating in tender procedures.