In its bid to level the playing field for tenderers in EU public procurements, the European Commission’s proposed regulation on foreign subsidies adds more red tape to an already complex area of EU law. The proposed ex-ante review of financial contributions received from non-EU governments risks deterring bidders and could mean contracting authorities miss out on the best value contracts for public funds.

The public procurement elements of the proposed regulation largely reflect the White Paper (discussed in our post here), with additional details fleshed out including the notification threshold and time limits for the EC’s review. The proposal reserves the investigatory powers to the EC rather than national authorities. It grants the EC extensive powers to prohibit the contract award or accept commitments where it finds there is a distortion from the foreign subsidy on the procurement process, as well as to enforce non-compliance.

We explore the key features of the proposal below:

Wide notification requirement for any foreign financial contributions

• Bidders in a public procurement process must notify the contracting authority of any foreign financial contribution received in the last three years (or confirm that they have not received any contributions). The notifications would then be transferred to the EC for review.
• “Financial contribution” is broadly defined and is capable of catching a variety of financial payments or advantages conferred by foreign governments. A contribution must be notified even if it does not amount to a foreign subsidy. The EC will determine in its preliminary review if the financial contribution actually constitutes a foreign subsidy (which is similar to the concept of State aid as we discuss here) and whether it distorts the EU internal market.
• A notification is only required for procurements with an estimated value of €250 million or more. The EC’s Impact Assessment estimates that circa 36 public procurement contracts would meet this threshold per year. Contracts falling within the scope of Directive 2009/81/EC (Defence Procurement Directive) are excluded from the procurement provisions in the Regulation. However, below threshold public procurements could still be subject to the EC’s scrutiny under its ex-officio powers to investigate where it suspects foreign subsidies have been received – so bidders in lower value procurements will also face uncertainty.

Two stage investigation procedure with long review periods

• The EC’s investigative process will have two steps:
• Preliminary review: in which the EC assesses the existence of a foreign subsidy and whether it distorts the EU internal market. This must be completed within 60 days after receipt of a complete notification.
• In-depth investigation: if the preliminary investigation identifies that an undertaking has been granted a foreign subsidy that distorts the EU internal market, an in-depth investigation will be initiated to further assess the foreign subsidy. This must be concluded within 200 days after receipt of the notification, subject to extensions “in exceptional circumstances”.
• Pending the EC's preliminary review, the procurement procedure can continue but the contract cannot be awarded. During an in-depth investigation the contract can be awarded before the EC reaches a decision but not to the bidder being investigated (unless the tender evaluation has established that the bidder in question has in any case submitted the most economically advantageous tender).
• Foreign subsidies of less than €5 million (over three years) are deemed unlikely to distort the EU internal market under the de minimis threshold.

Severe consequences for distortive foreign subsidies and non-compliance

• The EC will have the power to accept commitments from the bidder to remedy the distortion caused by the foreign subsidy. These could include divestment of assets, repayment of the foreign subsidy or refraining from investments. If commitments are not offered or not appropriate to address the concerns identified, the EC can prohibit the contract being awarded to the bidder in question.
• The EC has the power to review notifiable financial contributions proactively if they have not been notified.
• Non-compliance could lead to the EC imposing fines:
• of up to 10% of an undertaking’s aggregate turnover, for failure to notify a financial contribution in procurements meeting the threshold;
• of up to 10% of an undertaking’s aggregate turnover or periodic payments of up to 5% of the average daily aggregate turnover of the undertaking for each day of non-compliance, for failure to comply with a commitments decision; or
• of up to 1% of an undertaking’s aggregate turnover, for intentionally or negligently supplying incorrect or misleading information in the notification.

Uncertainty and red tape on the playing field

Although the proposal is designed to level the playing field between bidders by removing distortion caused by foreign subsidies, in addressing the perceived regulatory gap the proposal will also lead to some undesirable consequences. In the extreme, it could disincentivise foreign backed bidders from participating in EU procurements, especially where there are sensitivities about disclosing involvement from a foreign state.

The ex-ante notification regime introduces considerable additional administrative burdens, increased uncertainty and potential timing delays for bidders and contracting authorities.

It is unclear how the EC’s lengthy review periods will fit with the overall procurement procedure, especially as the power to investigate lies in the hands of the EC rather than the national contracting authorities who conduct the tender process. Delays caused by the EC’s review could undermine the benefit of the strict time limits in the Public Procurement Directives and could lead to less efficient allocation of public resources. Notably the proposal does not provide for shorter timeframes for urgency or exceptional circumstances (unlike the Public Procurement Directives).

The suspension of the contract award decision while the EC is conducting a preliminary review of a foreign subsidy could introduce delays and uncertainty to the process. However, allowing the contract to then be awarded during the EC’s in-depth review stage to a bidder not subject to the investigation could invite challenge based on the principles of equal treatment and non-discrimination. Additionally, awarding the contract to the bidder being investigated, if it is found to have the most economically advantageous tender notwithstanding the foreign subsidy, seems risky and it may be difficult to fully separate the foreign subsidy from the bid while the investigation is ongoing.

There is also an inconsistency with how State aid is taken into account under the existing Public Procurement Directives. State aid is only a relevant consideration where a tender is found to be “abnormally low” (which could be an indication of, or result from, the receipt of “illegal” State aid); EU bids are not otherwise screened for receipt of State aid. The difference in treatment for foreign subsidies could therefore undermine the principles of equal treatment and non-discrimination.

Finally, another key unintended consequence of the proposal may be that unsuccessful bidders use the rules to lodge strategic complaints in order to delay or disrupt the procurement process.

Next steps

The proposal is now open for public consultation and we expect it to receive extensive debate in the European Parliament and between the Member States.