knowledge 23 March 2023 |

Foreign subsidies and companies in public procurement – a changing landscape

Two significant European laws have recently come into force which have a significant impact on how bidders from outside the EU, or subsidised by third countries, participate in public procurement processes within the EU. These are:

• the European Foreign Subsidies Regulation (“FSR”) (Regulation (EU) 2022/2560) which came into force on 12 January 2023; and

• the International Procurement Instrument (“IPI”)  Regulation (EU) 2022/1031 which came into force in August 2022.

Foreign Subsidies Regulation

The FSR has an impact on mergers and concentrations, and on public procurement procedures. With regard to public procurement specifically, the key obligation is that placed on companies participating in tender processes to notify the European Commission where (i) the estimated contract value is at least €250 million and (ii) the foreign financial contribution involved is at least €4 million per non-EU country. In such circumstances, the contract cannot be awarded to the company in question, and following investigation, the European Commission may prohibit award of contracts to companies benefiting from distortive subsidies. As well as this notification obligation for larger procurements, the Commission is also empowered to start a review on its own initiative on smaller public procurement processes.

Upon notification of such a third country subsidy, the Commission will investigate its impact. No public contract may be concluded pending this investigation and breach of this requirement may lead to a fine of up to 10% of the company's annual aggregated turnover. During an investigation, the economic operator will have the opportunity to put forward evidence showing that there is, in fact, no distortion (or that it will take measures to remedy any distortion). The Commission can prohibit the conclusion of the contract, permit it, or permit it subject to conditions.

In terms of timeframes, the FSR does not apply to procurement processes begun before 12 July 2023. The notification obligation does not apply to companies until 12 October 2023. However, once these two time periods have passed, subsidies to tenderers occurring at any point within the previous 3 years must be notified.

The FSR applies to all public procurement procedures covered by the EU public procurement Directives (other than the Defence Directive), aside from contracts which are directly awarded by virtue of extreme urgency. Interestingly, the other provisions which permit direct awards (such as the sole supplier exemption) are subject to the FSR.

In a procedure exceeding the relevant threshold of €250m, tenderers (as well as “main subcontractors” and “main suppliers”, being those whose products or services relate to key elements of the contract or exceed 20% of the value of the contract) are required to notify the contracting authority whether they are subject to a qualifying foreign subsidy. The contracting authority is then responsible for transmitting the relevant notifications to the European Commission.  Contracting authorities should therefore ensure that tender documents for processes starting after 1 July 2023 include instructions informing tenderers of their obligations, and informing them of the consequences of receipt of a foreign subsidy (notably, investigation by the Commission and potential rejection of the tender). Contracting authorities also have an obligation to inform the Commission if they suspect a bidder is in receipt of a foreign subsidy, even if not notified.

Interestingly, the FSR includes very specific requirements as to missing documentation. If a tender does not include the required declaration as to whether the tenderer is subject to a foreign subsidy, the contracting authority may request that it be provided within 10 days. If it is not provided pursuant to that request, the Regulation goes on to state that the relevant tender shall be rejected. 

The Commission is currently finalising an Implementing Regulation which will set out the practical and procedural aspects of the application of the new rules (e.g. the forms and the rules on time limits).

Contracting authorities should ensure that they build time into their larger tender processes to account for a Commission review, should one of the tenderers be in receipt of a foreign subsidy.

Suppliers should also be aware of the new rules, and ensure that they notify any qualifying subsidies to contracting authorities in all relevant tender processes. Suppliers should also be ready to provide information and justification to the European Commission if required, with a view to demonstrating that the subsidy does not have a distortive effect, or that the negative impacts of the subsidy are outweighed by the positive impact of the economic activity.

International Procurement Instrument

The IPI introduces measures limiting non-EU companies’ access to the open EU public procurement market if the governments of those countries do not permit similar access to their own domestic public tenders for EU companies. By fostering reciprocity, the IPI aims to open up protected markets and to end discrimination against EU companies in third countries. The IPI does not apply to third countries with whom the EU has entered into bilateral or multilateral market access agreements.

The European Commission will determine whether and to what extent companies from a third country must be subject to an IPI measure, depending on the extent of the trade barriers. The Commission can then implement one of two approaches:

• Score adjustment – this would negatively affect the evaluations of bids submitted by tenderers from the third country; if that third country discriminates against EU bidders;

• Exclusion of bids from a discriminating third country.

The impact of these measures will be felt by any tenderer from a country to which an IPI applies, as well as any consortium members of such tenderer (as the exclusion or correction will apply to all members of the tenderer). Any score adjustment imposed will only affect the evaluation; it will not affect the price to be paid if the tenderer is awarded the contract.

Any IPI measures put in place by the Commission will take effect in procurement procedures launched after 29 August 2022 for contracts which are valued €15 million or greater in respect of works and concessions, and €5 million or greater for goods and services. IPI measures will not apply to call off contracts under a framework agreement.

A company that has acquired a contract through a procurement procedure which was subject to an IPI measure will have to comply with the following obligations throughout the duration of the contract:

• The successful tenderer cannot subcontract more than 50 % of the total value of the contract to undertakings from a third country subject to an IPI measure; and

• For goods contracts, the successful tenderer must ensure that the goods or services it provides which originate in the third country that is subject to the IPI measure, represent no more than 50% of the total value of the contract.

Failure to comply with the above obligations could expose the successful tenderer to a fine of between 10% - 30% of the contract value.

Conclusion

Both of these initiatives are aimed at ensuring that European companies are not unfairly prejudiced in public procurement processes by the actions of third countries. The FSR aims to close a regulatory gap, whereby subsidies by EU member states are subject to very stringent EU state aid rules, whereas subsidies by third countries are currently unregulated (leading to distortion on the market).  Similarly, the IPI emphasises the concept of reciprocity; non-EU companies’ access to the open EU public procurement market can be limited if the governments of those countries do not permit similar access to EU companies in their own domestic public tenders for EU.

The measures will be of interest to contracting authorities (who may be in receipt of bids from non-EU companies, or subsidised by non-EU states). Non-EU suppliers and those funded by non-EU subsidies will also need to be aware of these laws, to ensure that they can continue to supply to the EU public sector.