The impact of the EU's Foreign Subsidies Regulation and International Procurement Instrument on companies bidding for high-value public contracts in the EU

The European Union (EU) has recently introduced two new instruments that have the potential to significantly hinder the ability of non-EU companies to tender successfully for valuable public-sector contracts in the EU, including as part of a consortium.

Under the Foreign Subsidies Regulation (FSR), where a contracting authority in the EU has invited tenders for a contract worth more than Euro 250 million, bidders may need to make a notification in relation to financial contributions received from non-EU public authorities. The European Commission (Commission) will then investigate those contributions and may ultimately require the exclusion of that bidder from the procurement procedure.

The FSR is aimed at any company (most likely non-EU, but potentially also EU companies) that may have received subsidies from non-EU public authorities which distort competition in the
EU. The notification requirements under the FSR, however, are triggered not by "foreign subsidies" but rather by "foreign financial contributions", which have a much broader
scope. "Financial contributions" are widely defined to include any transfer of financial resources from a non-EU public authority, including even the payment for goods or services on market terms.

The EU has also adopted the International Procurement Instrument (IPI). The IPI is designed to encourage non-EU countries to open their public procurement markets to EU undertakings. If they fail to do so, the IPI empowers the Commission to impose measures that restrict the access of undertakings from that third country to public procurement procedures in the EU.

Any party involved in either awarding, or bidding for, high-value public contracts in the EU needs to be aware of these new measures. The main features and practical implications of the FSR and IPI are considered further below.

Overview of the FSR

The FSR empowers the Commission to tackle subsidies granted by non-EU public authorities to undertakings that wish to do business in the EU's internal market. The measure is intended to close a regulatory gap for non-EU subsidies, which are currently not subject to the same strict rules as subsidies granted by EU Member States under EU State aid rules.
The FSR creates three new tools for addressing foreign subsidies:

1. an ex officio tool, allowing the Commission to open investigations into any suspected foreign subsidies that may distort the EU internal market;
2. a concentrations tool, enabling the Commission to investigate and potentially block or unwind mergers, acquisitions or joint ventures that are supported by foreign subsidies; and
3. a public procurement tool, considered further below.

The FSR formally entered into force on 12 January 2023, but the regime does not apply until 12 July 2023. From that date, the Commission will be able to launch ex officio investigations. The mandatory notification requirements under the concentrations and public procurement tools will subsequently enter into force on 12 October 2023.

The public procurement tool under the FSR

This is a notification-based tool that empowers the Commission to investigate tenders for high-value public contracts in the EU that may have been subsidised by non-EU governments. As explained above, it goes beyond subsidies, as the notification thresholds are based on "financial contributions" rather than "subsidies" and therefore may be triggered by companies that have merely contracted with non-EU governments on market terms, for example, for the supply of goods, works or services.

Bidders are required to notify all financial contributions received from non-EU governments where:

1. the estimated value of the procurement in question is €250 million or more; and
2. the bidder group has received financial contributions totalling at least €4 million per third country over the three years prior to notification.

The Commission can also require notifications below this threshold, where it suspects the bidder group to have benefitted from foreign subsidies during the three years prior to the submission of its tender or request to participate.

Obligation to submit notification with bid

Where the above two thresholds are both met, the bidder will be required to make a notification to the contracting authority in relation to its financial contributions. Where the first threshold is met but the second is not, i.e. the procurement is high-value but the foreign financial contribution threshold is not met by a bidder group, the bidder must make a declaration that it does not meet the threshold and disclose the foreign financial contributions received.

Where the procurement is a multi-stage procedure (which will usually be the case for a contract worth more than €250 million), the notification or declaration (as appropriate) has to be submitted twice: first when the bidder initially requests to participate in the procurement procedure and, second, when it submits its final tender.

If a bidder fails to submit the required notification or declaration, its tender or request to participate must be declared irregular and rejected by the contracting authority. The Commission could, in principle, also impose a fine on the bidder of up to 10% of the bidder's turnover in its preceding financial year in cases of failures to make a notification.

The obligation to notify extends not only to foreign financial contributions received by the bidder group but also to any contributions received by the "main" subcontractors or suppliers of that bidder. A subcontractor or supplier is deemed to be "main" where its participation ensures key elements of the contract's performance and in any case where the economic value of its contribution exceeds 20% of the total value of the submitted tender.

Commission assessment of notification

Once the required notification or declaration has been received, the contracting authority must transfer it to the Commission. In the case of a notification, the Commission will then carry out a preliminary review within 20 working days. Assuming the procurement is multi-stage, the preliminary review is then suspended until the tenderer submits its updated notification at the time of its final tender. The Commission may then open an in-depth investigation, which can last up to 90 working days (around 4 to 5 months) from the date of the complete, updated notification.

During the preliminary review and the in-depth investigation, all procedural steps in the public procurement procedure may continue, except for the award of the contract.

The purpose of the Commission investigation is to ascertain whether there is a foreign subsidy that causes a distortion in the EU internal market. Such a distortion will be presumed to arise, in particular, where the foreign subsidy enables the bidder to submit an unduly advantageous tender in the procurement procedure.

If the Commission concludes that there is a foreign subsidy that distorts competition, the bidder can offer commitments to address the distortion. Where the bidder does not offer commitments, or where the commitments are not considered as satisfactory by the Commission, the award of the contract to the bidder in question is prohibited and the contracting authority must reject that bidder's tender. If that tender was assessed to be the most economically advantageous, the contract must be awarded instead to the bidder who submitted the next best tender.

Practical implications for participants in public procurement procedures in the EU

The FSR obligations described above will introduce a new layer of bureaucracy, complexity and potential delay into public procurement procedures for high-value projects in the EU. Such procedures are already complex and time-consuming exercises which must comply with the detailed rules laid down in the EU procurement directives.

Tenders for very large contracts (such as those worth more than Euro 250 million) tend to be submitted by bidding consortiums rather than individual companies. Moreover, the consortium may comprise companies from different parts of the globe.

As a result of the FSR, any consortium bidder will now need to verify carefully whether any members of the corporate groups of any of the parties to the consortium have been in receipt of financial contributions from any non-EU governments within the last 3 years. Bidders will also need to check the position of the main sub-contractors and suppliers which they intend to engage as part of their tender.

Bidders must then complete and submit a notification, providing information in relation to certain categories of foreign financial contributions, or "reportable financial contributions", which the Commission considers as being most potentially distortive. The final notification forms have yet to be published by the Commission and it remains to be seen how extensive the information requirements will be.

The above exercise may require significant due diligence by the bidding consortium, particularly as "financial contributions" are defined very widely under the FSR. The additional costs incurred by bidders in completing this exercise are likely to be passed on to contracting authorities (and, ultimately, EU taxpayers) in the form of higher prices in the tenders submitted.

Furthermore, both contracting authorities and bidders are likely to be concerned at the prospect of time delays towards the end of the procurement process. In particular, where the Commission decides to open an in-depth investigation, it will be necessary to wait four or five months, from the date when a bidder submits its updated FSR notification at the time of its final tender, until the Commission completes its investigation and communicates its final decision. The contracting authority will be able to use some of that period to complete its tender evaluation process, but some additional delay appears inevitable.

A contracting authority may conclude, pursuant to its evaluation of tenders, that a tenderer in receipt of foreign subsidies put forward the most economically advantageous tender. The authority may then be aggrieved to learn that it is not permitted to take advantage of that advantageous tender, because the Commission has decided that the tender causes a distortion of the EU internal market. Given the tight constraints on public sector budgets across the EU, a contracting authority is usually keen to accept economic savings wherever it can find them. The authority is unlikely to welcome being forced to select a more expensive, second-placed tender.

The one saving grace for contracting authorities and bidders alike is that the FSR only applies to procurements with an estimated value above Euro 250 million. This high threshold means that the FSR will only apply to the biggest public-sector projects and that the large majority of public procurement procedures will remain outside its scope.

The International Procurement Instrument (IPI)

The EU public procurement market is generally open to international competition from bidders from non-EU countries. However, the EU is concerned that many non-EU countries do not offer similar access to their own public procurement markets, resulting in the loss of substantial trading opportunities for EU businesses. To address this concern, the EU has adopted the IPI.

The IPI enables the EU to limit the access of non-EU companies to the EU public procurement market in cases where a non-EU country does not allow EU companies a similar access to its own public tenders. The underlying objective is to open these protected foreign markets to fair competition from EU suppliers.

Enforcement of the IPI is entrusted to the Commission. On its own initiative or in response to a complaint, the Commission may undertake investigations into alleged third-country measures or practices against EU suppliers, goods and services. The initial investigation may last up to 9 months and may be extended by a further 5 months.

Pursuant to the investigation, the Commission may decide to impose IPI measures which restrict the access of companies, goods or services from the third country in question to EU public procurement procedures. Specifically, the Commission may require contracting authorities in the EU either:

1. to impose a score adjustment of up to 50% on tenders submitted by bidders originating in that third country (negatively affecting the scoring and ranking of such tenders); or
2. to exclude tenders submitted by bidders originating in that third country.

Any IPI measures could apply to public tenders in the EU worth at least €15 million for works and concessions, while a lower threshold of €5 million applies for goods and services.

IPI measures may apply only in relation to ‘non-covered procurement’, which means public procurement procedures for goods, services or concessions for which the EU has not undertaken market access commitments in an international agreement on public procurement. The most important such agreement is the Government Procurement Agreement (GPA) between the EU and various developed nations, including the UK, the US, Canada, Australia and Japan.

Companies located in non-GPA countries (such as China, India or Brazil) should therefore monitor the position and look out for any IPI measures adopted by the Commission against their home country. Any such measures could severely hinder the ability of such companies to participate successfully in tenders for lucrative public contracts in the EU.

European Court to rule on whether non-EU suppliers enjoy rights under EU procurement law

Finally, it relevant to note that a court in Romania has asked the EU Court of Justice (in Case C-266/22 Qingdao Sifang) to rule on the question of whether a supplier based in a third country, such as China, enjoys rights to receive equal treatment under EU procurement law, including EU Directive 2014/24. The question arose after a bidder with its head office in China was excluded from bidding for a contract for 20 new electric trains in Romania.

On 11 May 2023, the Advocate General in the case issued a written opinion which, in essence, concludes that:

• Article 25 of Directive 2014/24 requires contracting authorities to give equal treatment to non-EU economic operators only if they are established in states that are signatories to the GPA or other international agreements binding on the EU.
• By contrast, operators established in non-signatory third countries, such as China, do not fall enjoy the rights provided for by the Directive and cannot invoke a breach of EU law principles.

The ruling of the EU Court of Justice itself is still awaited but the Court is likely to agree with the opinion of the Advocate General.

For more information on any of the above, please contact Adrian Brown, Lode Van Den Hende or Morris Schonberg in our Brussels office, or Tim Briggs in the London office.

 

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