Public procurement rules in the new EU regulation on foreign subsidies

On 12 January 2023, the Regulation on Foreign Subsidies Distorting the Internal Market, EU Regulation 2022/2560 (the “FSR”) entered into force.

We discussed the Regulation as well as the preparations undertakings should now be making in our first article on the FSR What’s it all about.

In line with its objective of ensuring a strong, open and competitive internal market in which European and foreign undertakings can compete (fairly) on the merits, the FSR also addresses public procurement procedures in its Chapter 4.

The EU even sees a particular need for action in the area of public procurement: the need to counteract market-distorting foreign subsidies is “especially salient” here because public contracts are financed by taxpayer funds (Recital No. 40).

This is the first time that far-reaching instruments of subsidy control have been introduced into public procurement law. The EU legal framework has until now only provided for control of whether aid has been received unlawfully from a Member State when examining tenders that appear to be abnormally low (Article 69(4) of the Public Procurement Directive 2014/24/EU).

From an institutional point of view, the FSR is breaking new ground by adopting the instruments of public procurement law: for the first time, the European Commission has been given direct powers to intervene and take decisions in public procurement procedures conducted in Member States.

Details of the requirements under public procurement law

Chapter 4 of the FSR sets out the rules for public procurement procedures. The rules cover procedures for the award of works, supply and service contracts as well as works and service concessions with the exception of defence and security-related contracts (cf. Article 28(1) and (3) of the FSR).

According to Article 27 of the FSR, a foreign subsidy that causes or risks causing a distortion in public procurement procedure can generally be assumed to exist where a foreign subsidy enables an economic operator to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned (Article 27 of the FSR).

In order to assess whether there may be a risk of distortion of the internal market due to unduly advantageous offers, the FSR provides for certain thresholds. If these thresholds are reached, undertakings must, when submitting a tender or a request to participate, notify the contracting authority of all foreign subsidies received during the previous three years. Even if they are not exceeded, the obligation to declare foreign financial contributions and confirm that they do not meet the thresholds still applies (Article 29(1) of the FSR).

The notification threshold is reached

• if the estimated value of the procurement procedure concerned is above €250 million, and
• at the same time, the foreign contribution exceeds €4 million per third country.

Where contracts are divided into different lots, an additional threshold of €125 million applies to the aggregate value of all lots for which the undertaking is applying (Article 28(2) of the FSR). This obligation also applies to the main subcontractors and suppliers if the economic share of their contribution exceeds 20% of the estimated contract value (Article 28(1)(b) in conjunction with Article 29(5) of the FSR).

If the above thresholds are exceeded, the undertaking must inform the contracting authority by means of a notification or a declaration. The contracting authority is in turn required to transfer this notification or declaration to the Commission for review without delay (Article 29(2) of the FSR).

Upon receipt of such a notification, the Commission will first check it for completeness and will then carry out a preliminary review for which it essentially has a period of 20 working days after receipt of a complete notification (Article 30(2) of the FSR). During the preliminary review, the procurement procedure may continue, but the contract may not be awarded yet (Article 32(1) of the FSR). Finally, if the Commission considers it necessary to carry out an in-depth investigation, it must normally complete same within 110 working days after it has received the notification (Article 30(5) of the FSR). While the Commission is conducting its investigation, the contract may not be awarded to an undertaking that has received foreign subsidies (Article 32(2) of the FSR).

In addition, contracting authorities may report to the Commission information on foreign subsidies that distort competition or communicate it to the Commission if they suspect that an undertaking has made a false declaration (Article 29(7) of the FSR). The Commission may also start an ex officio procedure and initiate an investigation (Article 29(8) of the FSR).

If the Commission finds that an undertaking benefits from a foreign subsidy which distorts the internal market, it has two options (Article 30 of the FSR):

• Where the undertaking offers sufficient commitments for redressive measures, the Commission may adopt a decision making them binding.
• In the absence of sufficient commitments, the Commission may prohibit the award of the contract to the undertaking concerned.

The substantive standards against which the Commission will assess a distortion of the internal market are the same as those used for foreign subsidy control as a whole (Articles 4 to 6 of the FSR).

If an undertaking fails to comply with procurement provisions, the Commission may impose fines and periodic penalty payments on it (Article 33(1) in conjunction with Article 17 of the FSR). Where an undertaking provides incomplete, incorrect or misleading information in its notification of financial contributions, the Commission may impose a fine on it not exceeding 1% of its aggregate turnover in the preceding financial year. Any failure to notify a subsidy or any circumvention or attempted circumvention of the notification requirements will also result in a fine not exceeding 10% of aggregate turnover (Article 33(2) and (3) of the FSR).

Preparation of procurement procedures in view of the FSR

The FSR applies to procurement procedures initiated on or after 12 July 2023 (Article 53(4) of the FSR).

Since the Regulation will cover subsidies and financial contributions already granted and is planned to take effect from the middle of this year, contracting authorities and undertakings should begin now to deal with the implications for procurement law of the FSR on foreign subsidies distorting the internal market:

• Contracting authorities should ensure that their procurement procedures are designed correctly and, in particular, that any foreign financial contributions are properly notified to the Commission.
• Undertakings that benefit from foreign financial contributions should review their financing and keep in mind the proper notification of contributions in procurement procedures ‒ especially in view of the considerable financial risks associated with incorrect notifications and missing information.
• Even undertakings that do not receive any financial contributions from third countries should keep the FSR in mind so that they can report infringements by competitors.

The Commission has announced that it intends to strictly enforce the FSR. We would be happy to assist you with the necessary checks and preparations for procedures or notifications.

More information about the FSR

This News Alert is the third in a series of articles about the FSR. Previous articles can be found here:

The EU Foreign Subsidies Regulation is here: What’s it all about?

What does the Foreign Subsidy Regulation mean for M&A transactions?

We will discuss the FSR in more detail in future News Alerts and will examine its impact on merger control, public procurement, foreign trade law and other topics. Please click here if you would like to receive all our News Alerts on the FSR.