Article

The EU Foreign Subsidies Regulation

Impact on public procurement procedures.

The EU Foreign Subsidies Regulation (FSR) was published on 23 December 2022. It will take effect on 12 July 2023 and provides for mandatory notification requirements from 12 October 2023. Accordingly, certain “concentrations” – ie M&A transactions – must not be closed and certain public contracts must not be awarded prior to obtaining clearance from the European Commission (EC). In this alert we give you our initial thoughts on the impact of the FSR on public procurement procedures.

Notification requirement applicable to high-volume public contracts and bidders

The EC must be notified by the contracting authority of any contemplated award of a public contract w\here:

  • the estimated contract value amounts to EUR250 million or more; and
  • any of the bidders – including EU companies – obtained financial contributions from non-EU Member States amounting to EUR4m or more per non-EU Member State within the last three years.

As regards the first criterion, estimating the contract value is to be carried out in accordance with the usual rules set out in the EU public procurement directives, as transposed in the domestic laws of the EU Member States (net amount, considering the entire term and all options of the contract etc).

Note that the notification obligation can be triggered below the EUR 250m threshold. Indeed, where the procedure is divided into lots, the notification obligation applies if the aggregate value of the lot(s) for which the bidder is bidding is EUR125m or more.

Applying the second criterion will, however, be more difficult:

  • First, the calculation of the amount of EUR4m must take into account all foreign “financial contributions” listed in the FSR. This is a broad notion that basically covers all payments and economic benefits that a bidder may have received from non-EU Member States (including EEA and EFTA Member States, the UK and the U.S.). Even remuneration received from non-EU Member States on the basis of (public) contracts qualifies as a relevant financial contribution.
  • Second, the bidder must not only consider foreign financial contributions that the bidder itself has benefitted from. The bidder must also include foreign financial contributions received by its “subsidiary companies without commercial autonomy”, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender in the public procurement procedure. Foreign financial contributions received by members of a bidder consortium are likely to be aggregated as well.
  • Third, in our experience, companies are unlikely to have the relevant data to hand allowing them to calculate the exact amount of foreign financial contributions. Bidders – as well as their parent companies, subsidiaries, subcontractors or suppliers – should start to establish appropriate internal systems to track foreign financial contributions as soon as possible. This will help mitigate the risk that they can no longer participate in tender procedures due to a lack of available up-to-date data.

Timing issue: no award of public contracts prior to EC clearance

Public contracts subject to the notification requirement must not be awarded prior to EC clearance.

From a procedural perspective, the interplay between the tender rules and the FSR can be summarised as follows:

  • The tendering entity publishes the usual contract notice on ted.europa.eu. Where tendering authorities set deadlines for the submission of applications or bids, they should consider carefully the time needed by potential bidders to gather information that they need to submit the required declaration on financial contributions obtained by non-EU Member States. This may take some time, particularly in the early days of the new FSR regime. Bidders may demand longer deadlines if they need more time to prepare their statement.
  • Bidders submit a declaration stating whether they received financial contributions amounting to EUR4m or more per non-EU Member State within the last three years. This statement is mandatory in any case, meaning each bidder willing to participate in the tender procedure must aggregate relevant foreign financial contributions in order to make a correct and reliable statement.
  • The tendering entity transfers bidders’ statements to the EC. It may go ahead with the tender procedure, but cannot make an award prior to EC clearance. The FSR explicitly states that bidders who benefitted from foreign financial contributions shall be entitled to be treated equally with other bidders.
  • The EC conducts a preliminary assessment (ie whether there are any distortive foreign subsidies) within 20 working days (approx. one month) after it was notified by the tendering entity. This deadline may be extended by ten working days.
  • The EC may terminate the procedure or launch an in-depth review. Any in-depth review shall not take longer than 110 working days (approx. six months). This deadline may be extended by 20 working days in exceptional cases. As is the case during the initial review, the public contract cannot not be awarded to the concerned bidder prior to a final decision issued by the EC.

Outcome of the EC’s review

There are three potential outcomes of an EC review:

  • The EC concludes that the bidder does not benefit from a distortive foreign subsidy. The public contract can be awarded to the bidder.
  • The EC concludes that the bidder benefits from a distortive foreign subsidy and the bidder offers remedies that address the distortion. Subject to those remedies, the public contract may be awarded to that bidder.
  • The EC concludes that the bidder benefits from a distortive foreign subsidy and remedies are not offered or cannot be agreed on – the tendering entity is prohibited from awarding the public contract to that bidder, and the next best bidder may be awarded the contract.

The impact of the EC’s decision is strictly limited to the tender procedure in question. It will not have a spill-over effect to other tender procedures, meaning that a clearance in relation to any previous tender procedure will not necessarily lead to the same outcome in a later procedure or, vice versa. Therefore, an EC veto in one case does not automatically trigger a bidder being prohibited from an award in another tender procedure.

Potential public procurement litigation

The notification procedure may lead to public procurement ligation: Excluded bidders may seek to challenge the EC’s decision and/or their exclusion from the tender procedure. In particular, excluded bidders may claim that the awarded bidder should have been excluded as a result of benefitting from foreign subsidies.

Draft implementation regulation specifying the scope of the notification requirement

In February 2023, the EC published a draft implementing regulation to the FSR, including annexes setting out the proposed notification templates.

These draft documents triggered significant feedback from stakeholders, most of them complaining about the complexity of information and data to be disclosed. The extent to which the EC reduces notification requirements in the interest of a more swift and accelerated notification procedure remains to be seen.

Read more on the draft implementing regulation in our separate commentary.

Uncertainty between 12 July 2023 and 12 October 2023

The FSR provides that the notification obligation for public procurement procedures meeting the thresholds discussed above applies from 12 October 2023.

However, the FSR states that the regime applies to all relevant tender procedures that were launched after 12 July 2023. It is not yet clear whether the EC will accept precautionary notifications in the interests of legal certainty.

Scope of relevant public contracts

The FSR covers a broad range of public contracts:

  • Public work, supply and service contracts in terms of the “general” EU public procurement directive 2014/24/EU as applicable particularly to public authorities and state-owned enterprises operating in a non-commercial manner;
  • Work, supply and service contracts under the EU “utility” directive 2014/25/EU as applicable to certain companies in the energy and similar sectors;
  • Works and service concessions in terms of the EU “concessions” directive 2014/23/EU.

Framework agreements are caught by the FSR in the same manner as ad hoc contracts.

On the other hand, where a public contract can be awarded to a specific economic operator due to technical or legal exclusivity, the award shall be notified to the EC but the EC is not entitled to scrutinise the bidder (although a limited ex officio review might be possible).

Out-of-scope contracts

The notification requirement does not apply to the following public contracts in particular – and these exemptions are likely to minimise the impact of the FSR on public procurement procedures significantly:

  • Public contracts below the EUR250m (respectively EUR125m for lots) threshold;
  • Public contracts in the fields of defence and security as regulated by Directive 2009/81/EC;
  • Public contracts falling under the national security exemption of Art. 346 AEUV;
  • Public contracts if they can be awarded in a negotiated procedure without prior publication due to unforeseeable urgency;
  • Concessions not caught by Directive 2014/23/EU (eg in the water supply sector).

Finally, it will be interesting to see how the reference in the FSR (at Article 44) to the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) will be interpreted (and whether this interpretation may further restrict the scope of application of the FSR).

Review possible even where notification thresholds are not met

Where the notification requirement does not apply, the EC is entitled to review tender procedures and bids “ex officio”, ie on its own initiative. Such ex officio investigation may be launched on the basis of whatever information the EC may have received, which could include complaints.

However, the launch of an ex officio review is entirely within the EC’s discretion. No action can therefore be taken against the EC to investigate.

Likewise, once the EC launches an investigation, eg on the basis of a complaint, a complainant cannot revoke his complaint and prevent the EC from digging deeper.

In the public procurement sector, the ex officio instrument is limited and in practice may not have much teeth:

  • An ex officio review shall not be launched prior to the award of a contract, ie this review is not designed to prevent a tendering entity from awarding a contract to a bidder who may have benefitted from distortive foreign subsidies.
  • Further, the ex officio review shall not entitle the EC to wind-up or terminate contracts that are already awarded. It is therefore rather unclear what the outcome of an ex officio review could be.

Beyond FSR – further developments to note

Even though the EU legislator is not currently reviewing the EU’s legal framework applicable to public procurement procedures as such, there are nevertheless a number of notable developments besides the FSR. For example:

  • A (still) rather hidden provision that utilities may rely on is Art. 85 para. 2 Directive 2014/25/EU. Accordingly, any tender submitted for the award of a supply contract may be rejected where the proportion of the products originating in third countries, as determined in accordance with Regulation (EU) No 952/2013 of the European Parliament and of the Council (43), exceeds 50% of the total value of the products constituting the tender; software used in telecommunications network equipment shall be regarded as products.
  • Regulation (EU) 2021/694 of the European Parliament and of the Council of 29 April 2021 establishing the Digital Europe Programme and repealing Decision (EU) 2015/2240 allows for restricting calls for proposals and calls for tenders to legal entities established or deemed to be established in Member States and controlled by Member States or by nationals of Member States.
  • In June 2022, the Regulation (EU) 2022/1031 of the European Parliament and of the Council on the access of third-country economic operators, goods and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods and services to the public procurement and concession markets of third countries (International Procurement Instrument – IPI) was published and entered into force 60 days later.
  • According to the current proposal for a Regulation of the European Parliament and of the Council concerning batteries and waste batteries, repealing Directive 2006/66/EC and amending Regulation (EU) No 2019/1020, explicitly states that tendering entities, when procuring batteries or products containing batteries in situations covered by those Directives, take account of the environmental impacts of batteries over their life cycle with a view to ensure that such impacts of the batteries procured are kept to a minimum.
  • Laws such as the German Supply Chain Act that entered into force in January 2023, and the pending Belgian federal proposal for an act regarding a duty of care across the value chain, require bidders that infringed such human rights and environmental related due diligence obligations to be excluded from public tenders.

A&O Public Law Group

As regulatory measures, government intervention and public sector spending are omnipresent in today’s economic climate, we have specialists in number of jurisdictions of public law issues. The focus of our experts includes especially administrative contracts, public procurement, freedom of information, government-owned assets, foreign direct investments regimes and also state aid issues in particular when dealing with administrative contracts.

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