Public procurement procedures: Overview of new review mechanisms under the Foreign Subsidies Regulation ("FSR")

I. Overview

In our newsletter of 9 March 2023, we provided an overview of the impact of the Regulation on Foreign Subsidies Distorting the Internal Market (Regulation (EU) 2022/2560; "Foreign Subsidies Regulation – FSR") on M&A transactions. The FSR is a relatively new area of EU law which aims to ensure fair competition within the EU's single market by addressing distortions arising from foreign subsidies.

The FSR does not only introduce another notification requirement for M&A transactions, but also aims to ensure that the procurement of works, supplies and services by public authorities in the EU is conducted in a transparent, competitive and non-discriminatory manner. The FSR presents new requirements for public procurement procedures, which we will examine in detail.

Upon the submission of a notification or declaration by a company participating in a public procurement procedure (“economic operator”), the European Commission will examine whether financial contributions from non-EU countries enable the company to submit a tender that is unduly advantageous in relation to the works, supplies or services concerned. In this case, the foreign subsidies are regarded as causing or risking to cause a distortion in a public procurement procedure.

The FSR entered into force on 12 January 2023 and will apply to public procurement procedures initiated on or after 12 July 2023.

As of this date, the European Commission may initiate ex officio investigations into (and require ad hoc notifications for) matters not meeting the thresholds below where there is a suspicion of foreign subsidies distorting competition in the EU. Ex officio reviews into public procurements are limited to awarded contracts.

Prior notifications or declarations by companies in the context of public procurement procedures are not required until 12 October 2023.

II. Notification requirement in public procurement procedures

Companies must notify foreign financial contributions in public procurement procedures if the following thresholds are reached:

1. the estimated value of the public procurement or framework agreement or a specific procurement under the dynamic purchasing system is at least EUR 250 million; and

2. the economic operator was granted financial contributions of at least EUR 4 million per third country in the last three years.

If the procurement has been divided into lots, the estimated value of the public procurement must be at least EUR 250 million and the value of the lot or the total value of all lots to which the tenderer applies must be at least EUR 125 million.

The concept of a financial contribution is extremely broad and not only includes funds or liabilities (e. g. loans, loan guarantees or debt forgiveness), but also the provision as well as the purchase of goods and services.

It should be noted that the financial contributions to the economic operator also include its subsidiaries without commercial autonomy, its holding companies and, where applicable, main subcontractors and suppliers involved in the same tender in the public procurement procedure. This means that the financial contributions to different subsidiaries or parent companies are aggregated.

III. Procedure

If the thresholds are met, companies participating in a public procurement procedure shall notify to the contracting authority (or entity) all foreign financial contributions. If the thresholds are not met, the company shall list in a declaration all foreign financial contributions received and confirm that the thresholds are not met.

The contracting authority shall immediately transfer the notification or declaration of the financial contributions to the European Commission. The European Commission verifies the completeness and then conducts a preliminary review within a period of 20 working days. If the European Commission considers an in-depth review to be necessary, this must normally be completed within 110 working days of receipt of the notification.

During the examination, the public procurement procedure may continue, but the contract may not yet be awarded. During the in-depth review, the contract may not be awarded to a company that has received foreign subsidies.

IV. Substantive test

A foreign subsidy exists where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries.

A distortion in the internal market exists where a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, that foreign subsidy actually or potentially negatively affects competition in the internal market.

The European Commission can carry out a so-called balancing test, in which it balances the positive and negative effects of foreign subsidies.

If the European Commission determines that a company is benefiting from a foreign subsidy that distorts the internal market, it may

• declare (appropriate and sufficient) commitments by the company to eliminate the distortion of the internal market to be binding.
• prohibit the award of the contract to the company in question.

V. Sanctions

If the provisions are not observed, the European Commission may impose fines and periodic penalty payments on the company. Incorrect or misleading information in the notification or declaration of financial contributions can be punished with fines of up to 1 % of the total turnover achieved in the previous year. The failure to report a financial contribution or circumvention constellations can be punished with fines of up to 10 % of the total turnover.

It should be noted that contracting authorities can also report foreign subsidies to the European Commission. In addition, the European Commission may also act on its own initiative and initiate an investigation or require the notification of foreign financial contributions received by the company.

VI. Next steps

The European Commission intends to publish an Implementing Regulation in the second quarter of 2023. The Implementing Regulation sets out the form of the notifications and provides more details on the procedure. The feedback received on the draft can be accessed via the website of the European Commission.

Already now, contracting authorities and companies should prepare for the implications of the Regulation on Foreign Subsidies Distorting the Internal Market on public procurement procedures:

• Contracting authorities should adapt the design of their public procurement procedures (including in terms of timing) and pay attention to the transfer of declarations or notifications of foreign financial contributions to the European Commission.
• Companies that have received financial contributions from non-EU countries should prepare corresponding information before notifications and declarations under the FSR become mandatory, so that it can be retrieved in the event of a procurement procedure. Against the background that a missing or incorrect declaration or notification entails a risk of severe fines or penalty payments, this means:

1. gathering information internally on foreign financial contributions received in the past three years, e. g., form and terms of the financial contribution, granting entity, purpose, and economic rationale for granting the contribution, as well as supporting evidence.

2. developing tools to monitor foreign contributions on a global scale, keeping in mind that the concept of “financial contribution” is very broad and includes loan guarantees or fiscal incentives.

Based on our experience in EU state aid law, we assist in the assessment of which of these financial contributions could be considered as foreign subsidies and which positive effects of financial contributions have to be taken into account in the balancing test.

VII. Further Information

• Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market
• Website of the European Commission
• Draft Commission Implementing Regulation (EU) …/… of XXX on detailed arrangements for the conduct of proceedings by the Commission pursuant to Regulation (EU) 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market (and feedback)
• Our Newsletter on Notification Requirements in M&A Transactions