Regulation on foreign subsidies and public procurements: an overview

The EU is caught in the middle between the objective of a "strong, open and competitive internal market"¹ and the challenge that "foreign subsidies can distort the internal market and undermine the level playing field for various economic activities in the Union"². Indeed, the EU has noted that many non-EU countries use subsidies to gain access to the European market.

In order to solve this difficult situation, Regulation (EU) 2022/2560 of December 14, 2022, known as the "Foreign Subsidies Regulation" (FSR), was recently adopted and came into force on January 12, 2023. It became effective on July 12, 2023, and its notification requirements came into force on October 12, 2023. The FSR applies to all public procurement procedures covered by Directives 2014/23/EU; 2014/24/EU and 2014/25/EU.

The aim of this regulation is to ensure the smooth running of the internal market and to guarantee fair conditions of competition. It strengthens the European Commission's control over the internal market.

The context around this new regulation is also noteworthy. Prior to the adoption of this regulation, there was no European Union legal instrument addressing the distortions caused by foreign subsidies. In fact, recently, the EU has adopted regulations to prevent distortions in the internal market. This philosophy has led the EU to adopt Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 mars 2019 establishing a framework for the screening of foreign direct investments into the Union, and Regulation (EU) 2022/1031 of June 23, 2022, known as the "International Procurement Instrument".

The European Council called for "additional instruments to combat the distorting effects of foreign subsidies on the single market"³. In this context, the FSR is seen as a key tool to protect the common commercial policy and effectively combating distortions in the internal market caused by foreign subsidies to ensure a level playing field.

The two main fields which are concerned by this legal framework are:

• Competition law
• Public procurement

Key concepts from the FSR Regulation can be linked to State aid control procedures. A wide definition is given to foreign subsidies, which can be characterised by the transfer of funds or liabilities, foregoing of revenue, provision of goods or services and so on. It is also noteworthy that a subsidy must confer "a benefit on and 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"⁴.

Against this background, this article briefly summarises the mechanisms brought about by the FSR for public procurement procedures.

What is the scope of the FSR ?

The FSR is designed to control the impact of foreign subsidies granted by non-EU countries to companies bidding for public procurements in the EU, and which therefore distort the internal market.

This Regulation applies to all undertakings, including public undertakings directly or indirectly controlled by a State, carrying out an economic activity within the Union.

Foreign subsidies are defined by the FSR as a financial contribution provided directly or indirectly by a third country, which confers an advantage and is limited to one or more undertakings or to one or more sectors pursuing an economic activity (i.e. selective) in the internal market. They may be provided by public or private entities. Such contributions confer an advantage on an undertaking if it could not have obtained it under normal market conditions, and if they enable an economic operator to submit an unduly advantageous tender.

Only foreign subsidies granted during the three years preceding a notification under the FSR are considered in the assessment. Thus, foreign subsidies not exceeding the threshold of 4.000.000 euros over a period of three consecutive years are unlikely to distort the internal market within the meaning of the FSR.

For reasons of legal certainty, the Commission may investigate foreign subsidies for a period limited to ten years from the date on which the subsidy was granted.

What are the FSR measures which are linked to public procurement?

The structure of the FSR is clear. After a chapter 1 dedicated to general provisions (definitions, scope of application, etc.), Chapter 2 develops the Commission's power of ex-officio review and general provisions for the review of foreign subsidies. Then, Chapter 4 is dedicated to public procurements and concession contracts.

Apart from those provisions that all apply to public procurement and concession contracts, there is a Chapter 3 on the control of foreign subsidies in concentrations. Chapter 5 provides for procedural rules, that apply both for the control of foreign subsidies in concentrations and in public procurements and concession contracts. Chapter 6 deals with relationship between the FSR and other instruments, such as the procurement and concessions directives⁵ and provides that the FSR shall be interpreted consistently with those directives.

In this framework, the European Commission has a major role in controlling foreign subsidies. Because of its economic significance in the internal market and the fact that it is financed by taxpayer funds, the Commission wants to improve its control on public procurement.

We can highlight two measures that constitute the backbone of the FSR:

• The prior notification tool;
• The ex-officio review.

Focus on the prior notification tool

Prior notification, as provided for in article 29 of the regulation, is the main instrument for public procurements. This system involves cooperation between bidders, contracting authorities and the European Commission.

• First of all, prior notification can be mandatory. Two cumulative conditions must be met:

  • The estimated value of the public contract, calculated pursuant to the rules set in the EU Procurement directives, excluding VAT, is equal to or greater than 250.000.000 euros; This information can be found in the tender notice published by the contracting authorities.
  • The total financial contributions granted to the economic operator in the three years preceding notification are equal to or greater than 4.000.000 euros per third country.
  • However, when the contract or concession is divided into lots, an additional threshold shall be considered. Prior notification is required when the value of the lot or the cumulative value of all the lots for which the bidder is submitting an offer is equal to, or greater than, 125.000.000 euros excl. VAT.

The European Commission has specified that the obligation of prior notification also applies to groups of economic operators. In this case, it is necessary to assess whether the value of the lot or the aggregate value of all the lots for which the group of economic operators is applying is greater than or equal to 125,000,000 euros. The amount of foreign subsidies, for the corresponding threshold, is then assessed individually, for each member of the consortium of economic operators.

• If one of the members of the group of economic operators has obtained, over the last three years, foreign financial contributions equal to or greater than the threshold of 4.000.000 euros per third country and is therefore subject to the notification obligation, then all the other members of the consortium must submit a joint prior notification.

• On the other hand, if none of the economic operators has received foreign financial contributions exceeding the threshold of 4.000.000 euros per third country over the last three years, then the grouping of economic operators only needs to submit a joint declaration.

If the thresholds are reached, bidders must pass on any foreign financial contributions they have received to the contracting authority, by completing a form called FS-PP. The notification must be accompanied with all relevant supporting documents. Where the procurement or concession contract concerned has been awarded in a single-stage procedure, a single notification must be made by the economic operator when the tender is submitted. On the other hand, if the award procedure is in several stages, then the operator must make two notifications: the first when requesting participation in the tender procedure, and the second - updated as the case may be - when submitting the tender.

• if the operator fulfils all the above conditions but fails to notify the contracting authority in advance, his bid will be declared irregular and will, therefore, be rejected.

Authorities must then forward the form to the European Commission without delay. Following receipt of the complete notification, the Commission has a maximum of 20 days to open a preliminary examination. If necessary, the Commission may open an in-depth investigation, which will end 90 days later i.e. a total of 110 days is assigned for the Commission's assessment.

• Below these thresholds, applicants need only to make a declaration of all foreign financial contributions received⁶.

• Finally, there are cases where prior notification is optional under article 29 paragraph 8 of the FSR. When the European Commission "suspects that an economic operator may have benefited from foreign subsidies during the three years preceding the submission of the tender or the request to participate in the public procurement or concession procedure, it may, before awarding the contract or concession, request notification of foreign financial contributions provided by third countries to this economic operator". In this case, the notification requested by the Commission must comply with the same rules and procedure as those detailed above. Such situation may arise if, for instance, an economic operator informs the Commission that a competitor, in a given procurement procedure, may have received foreign subsidies.

In accordance with article 32 of the FSR, "During the preliminary examination and in-depth investigation, all stages of the procedure for the award of public contracts or concessions may continue, with the exception of the award of the contract or concession".

The contracting entity or the contracting entity must therefore wait for the Commission's final decision before awarding the public procurement to an economic operator who has notified a foreign subsidy. However, if the time limits set by the Commission have not been respected, the purchaser may award the contract to any operator.

News: On 16 February, the European Commission announced the initiation of its first in-depth investigation under the FSR in the context of a public procurement procedure launched by Bulgaria's Ministry of Transport and Communications, relating to the provision of several electric "push-pull" trains as well as related maintenance and staff training services, following a formal notification made by a Chinese State-owned company⁷.

Focus on the ex-officio review

Article 9 of the FSR provides that the ex officio examination is a general investigative tool which enables the Commission, on its own initiative, to carry out checks on contracts after their award. This means that any contract which does not meet the thresholds for prior notification could still be examined by the Commission if it suspects that an economic operator has benefited from foreign subsidies that may distort the internal market.

Under this ex officio procedure, the Commission first initiates a preliminary examination. It may ask the economic operator concerned for explanations but may also request information from other companies or member States.

In order to preserve legal certainty and stability in ongoing contractual relationships, the FSR provides that "Such reviews shall not result in the cancellation of the decision awarding a contract or in a termination of a contract"⁸.

If the Commission considers, based on the evidence obtained in the preliminary investigation, that a foreign subsidy may have distorted the internal market, it will initiate an in-depth investigation. The Commission may impose redressive measures. The company under investigation may be given the opportunity to offer commitments, such as repayment of the subsidy in addition to appropriate interests, to fully and effectively remedy the distortion caused by the foreign subsidy. If the Commission considers that these commitments effectively remedy the distortion, then it may make them binding by way of a decision. The Commission should then no longer be able to impose redressive measures.

Following the opening of the screening, the Commission has an indicative period of 18 months to adopt a final decision.

What types of decisions can the Commission take following ex officio examination or prior notification?

Following prior notification or ex officio examination, the European Commission can adopt three types of decision listed at article 31 of the FSR:

• A decision not to raise objections: The Commission issues such a decision when it can be deduced from its balancing exercise that the foreign subsidy is offset by positive effects; or when the economic operator has simply not benefited from a foreign subsidy distorting the internal market.

• A decision on the economic operator's commitments: When a distortion of the domestic market is observed because of a foreign subsidy, the economic operator may undertake commitments or remedial measures which "are proportionate and fully and effectively remedy the actual or potential distortion of the domestic market caused by the foreign subsidy". A list of such measures is set out in Article 7 of the FSR. They are intended to remedy any distortion caused by a foreign subsidy in the internal market. Thus, the Commission should choose the measure that is least restrictive for the company under investigation.

• A decision prohibiting the award of the contract or concession in question: If the economic operator does not offer sufficient commitments and they do not meet the conditions laid down in article 7, then the purchaser must reject the offer.

In the interests of transparency and legal certainty, all Commission's decisions are made public.

FSR Regulation: a real impact on public procurement procedures?

The FSR is very focused and provides for coercive measures. Its adoption illustrates a new paradigm for European public procurement: transparency is fundamental to access the internal market. The FSR has been commented to be the end of the "European naivety"⁹.

If, at first glance, this regulation seems to highlight the European Union's desire to protect its trade practices and its internal market from the growing intervention of third countries, there are nonetheless a number of questions. Alan Hervé wonders "whether the Union will have the political will to make extensive use of this new mechanism, in particular against subsidies originating from China and the United States, countries on which it remains highly dependent in economic and security terms"¹⁰.

Despite these new measures, doubts are permitted. For instance, the thresholds can be discussed. Even if the European Commission can control any procurement contract with its ex officio power, mandatory notification only applies when the value of the contract, excluding VAT, exceeds 250.000.000 euros. This threshold is more than 150 times higher than the European thresholds for formalized procedures. It can be considered that few procurement procedures will therefore fall under the FSR prior notification mechanism. The FSR itself explains this choice by the desire "to identify economically important cases, while minimizing the administrative burden and not hindering the participation of SMEs in public contracts and concessions"¹¹. Only the largest public contracts are therefore subject to this prior notification obligation.

The same could be said for the additional threshold for contracts divided into lots and for the foreign subsidies threshold, which questions the effectiveness and the true purpose of this new regulation.

In a nutshell, the FSR Regulation does not appear as a revolution for public procurement procedures, but creates an additional tool to control State support to economic operators, using the same approach as the EU approach to State aids.

The Commission has a central and active role in this new framework and is effectively using its powers, which asks the question of the role of National authorities. This may create difficulties of implementation unless a genuine and effective dialog is established between national contracting authorities and the European Commission.  

Key Words: Public Procurements - Regulation - Foreign subsidies regulation

¹ Regulation (EU) 2022/2560 of the European Parliament and oh the Council of 14 December 2022 on foreign subsidies distorting the internal market (FSR), Recital 1.
² Ibid 4th Recital.
³ European Council conclusions of 1 and 2 October 2020.
⁴ FSR, Article 3.
⁵ Directives 2009/81/EC, 2014/23/EU, 2014/24/EU and 2014/25/EU, and Council Directives 89/665/EEC (26) and 92/13/EEC (27).
⁶ The financial contribution must have been provided to the economic operator, including its subsidiaries without commercial autonomy, its holding companies and, where applicable, its main subcontractors and suppliers involved in the same tender as part of the public procurement procedure, has been granted.
⁷ https://ec.europa.eu/commission/presscorner/detail/en/IP_24_887
⁸ FSR, article 9, final sentence.
⁹ Michaël Karpenschif. L'exportation du contrôle européen des aides d'Etat aux pays tiers, ou la fin de la naïveté européenne. JCP A, n°8, 27 février 2023.
¹⁰ Chronique Action extérieure de l'Union européenne - "The European legislator is strengthening its arsenal to combat foreign subsidies" - Alain Hervé, Professor at Sciences Po Rennes
¹¹ FSR, recital 40.