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Application of the Foreign Subsidies Regulation to tenders looms

The 12th July 2023 marks the date on which the Foreign Subsidies Regulations (‘FSR’) starts to apply, allowing the Commission to start its ex officio investigations. It has now been confirmed that as of the 12th October 2023 the notification obligations (with respect to public procurement procedures) applicable to contracting authorities and bidders will come into force.

The FSR is a new set of rules to address market distortions caused by non-EU governments to companies active in the EU, in an attempt to ensure a level playing field for all companies operating in the Single Market. This development arises in the context where, over the past years, unchecked foreign subsidies appear to have granted unfair advantages to recipients in obtaining public procurement contracts in the EU.

The new Regulation covers a wide range of contributions including direct grants, interest-free/low-interest loans, tax incentives, state-funded R&D, government contracts, and grants of exclusive rights without adequate remuneration. It grants the Commission the power to investigate such subsidies and, if it finds that they are distortive, the power to impose measures to redress the distortive effect or even to prohibit a contract award to the tenderer in question. To deal with this significant investigative burden, the Commission shall be engaging around 145 full-time employees specifically to monitor and investigate compliance with the FSR.

The FSR will inter alia introduce a notification-based tool whereby economic operators bidding for tenders with an estimated contract value of at least €250 million will be required to notify foreign financial contributions of at least €4 million per third country received in the three years preceding notifications (and to declare them even when lower in amount). Contracting authorities will be required to set down this notification obligation in their contract notices or procurement documents. Pending the Commission’s review, the investigated bidder may not be awarded the contract.

The Commission is also granted a general investigation tool allowing it to start investigations on its own initiative (ex officio investigations), which it may use for public procurement contracts below the threshold.

The FSR brings with it heavy consequences, with a failure to report potentially resulting in disqualification from a public tender and the payment of severe fines, namely:

  • up to 1% of aggregate turnover in the preceding year in the case of incomplete, incorrect or misleading information being supplied to a Commission request for information or failure to supply the information within the prescribed time limit; and
  • up to 10% of aggregate turnover in the preceding year in the case of failure to notify subsidies during the procurement procedure or otherwise circumventing or attempting to circumvent notification requirements.

This Regulation is expected to affect a large number of public infrastructure projects in the EU and shall have significant impacts on their procurement procedures. Some impacts which we forsee include:

  • procurement procedures may take up to four months longer, since contracts cannot be awarded until the Commission has decided on a notification or its deadline to do so expires;
  • an increase in domestic litigation against contracting authorities who have not put in a notification obligation or challenging tender awards (potentially a shift of arguments from abnormally low tenders to foreign subsidies involvement);
  • an increase in litigation before EU courts against Commission decisions;
  • a significant administrative burden for tenderers, who shall have to gather information in advance on foreign financial contributions received.

Receipt of feedback on the Implementing Regulation, which will provide us with much of the detail on how the procedure shall work, has closed, with it being expected that the final draft will be adopted sometime during this quarter.

We shall provide an update once this is available, but please feel free to get in touch should you have any queries in the meantime.