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The EU Foreign Subsidies Regulation, FSR was adopted a couple of years ago, to enable the Commission addressing distortions to the European internal market caused by foreign subsidies. Hence the rules allow corporate community in the EU states to ensure a level playing field for all companies, while remaining open to trade and investment. Foreign subsidies also include control, participation in public procurement and other forms of direct investments. Thus, the FSR needs some amendments; the new guidance provides for the regulatory optimism…
Background
A strong, open and competitive internal market enables both European and foreign undertakings to compete on merits. The Union benefits from a sophisticated and effective system of State aid control, aiming at ensuring fair conditions for all undertakings engaging in an economic activity in the internal market. This State aid control system prevents Member States from granting State aid that unduly distorts competition in the internal market.
At the same time, both private undertakings and public undertakings which are directly or indirectly controlled or owned by a state, might receive subsidies from third countries, which are then used, for instance, to finance economic activities in the internal market in any sector of the economy, such as participation in public procurement procedures, or the acquisition of undertakings, including those with strategic assets such as critical infrastructure and innovative technologies. Such foreign subsidies are currently not subject to Union State aid rules.
The foreign subsidies regulation (FSR) started to apply in the EU since July 2023: this set of rules enables the Commission to investigate financial contributions granted by non-EU governments to companies operating in the EU. The FSR’s idea was to ensure a level playing field for all companies operating in the single market, while keeping the EU open to trade and investment.
However, since then, it has appeared that foreign subsidies have distorted the EU’s internal market, by providing their recipients with an unfair advantage to acquire companies or obtain public procurement contracts. Prior to the FSR, subsidies granted by EU countries were subject to close scrutiny under EU state aid rules, while subsidies granted by non-EU governments were unchecked. The FSR addresses this regulatory gap by enabling the Commission to assess and remedy distortions caused by foreign subsidies. If such subsidies are found to be distortive, the Commission can impose corrective measures to level the playing field.
More on FSR in: https://eur-lex.europa.eu/eli/reg/2022/2560/oj
FRS’s new key procedures
The FSR establishes 3 investigative procedures:
= Public Procurement Investigations: these procedures apply to bids in such public procurement where non-EU financial contributions are involved and the estimated contract value is at least €250 million. If the procurement is divided into lots, FSR obligations apply when the net estimated value exceeds €250 million, and the value of an individual lot or the total of all lots applied for is at least €125 million. This procedure is managed by the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW).
= Concentrations reviews (notification-based procedure): this procedure applies to mergers and acquisitions (concentrations) where: a) the acquired company, one of the merging parties, or the joint venture generates at least €500 million in EU turnover; and b) the involved parties received foreign financial contributions exceeding €50 million in the past 3 years. This procedure is managed by another Directorate-General for Competition, the DG COMP.
More on DG COMP in: https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en
= Ex-officio market investigations: this procedure allows the Commission to launch investigations on its own initiative into all other market situations where foreign subsidies may cause distortions.
Source and citations from: https://single-market-economy.ec.europa.eu/single-market/public-procurement/foreign-subsidies-regulation_en
Bottom line. The FSR applies to public procurement procedures where the total estimated contract value (excluding VAT) is €250 million or more. If the contracting authority divides the procurement into lots, the FSR obligations apply: a) when the estimated net procurement value exceeds €250 million, and b) the value of the lots the tenderer applies for is at least €125 million (either individually or in aggregate).
Source: https://single-market-economy.ec.europa.eu/single-market/public-procurement/foreign-subsidies-regulation/foreign-subsidies-regulation-fsr-public-procurement-procedures_en
New Commission guidelines
In the recently published FSR guidelines, the European Commission provides additional predictability and ensure transparency for the corporate sector. The new rules clarify several concepts, e.g. the Commission decisions on the distortion of competition caused by a foreign subsidy, the distortive effects “balanced against any positive effects of a foreign subsidy”, and the Commission’s power to request prior notification of below-threshold cases.
The Guidelines clarify several aspects of the FSR:
= The assessment of distortions (Article 4(1) FSR). The Guidelines clarify that once the Commission has found that a company pursuing an economic activity within the internal market has benefitted from a foreign subsidy, it will assess whether there is a distortion through two steps. First, the Commission will examine if the foreign subsidy strengthens the company’s competitive position in the EU. For subsidies not targeted at economic activities in the EU a more detailed analysis will be conducted to assess the risk that they are used to cross-subsidize economic activities in the EU. Second, the Commission will consider the impact on competition by analysing whether the subsidy is liable to alter the company’s competitive behavior and market dynamics to the detriment of other operators. The Guidelines provide a non-exhaustive list of examples of subsidies that may be considered distortive.
= The assessment of distortions specifically in public procurement procedures (Article 27 FSR). If an economic operator participates in a public procurement procedure in the internal market and the Commission has information that a foreign subsidy may have affected the terms of the tender, it will assess whether there has been a distortion. First, the Commission will assess whether the economic operator may have used the foreign subsidy in designing the terms of its bid. If so, the Commission will assess whether the submitted bid is unduly advantageous by comparing it with the other submitted bids in the procedure and the contracting authority’s estimates. If the bid is unduly advantageous, the Commission will assess whether the advantage stems to an appreciable extent from the foreign subsidy or from other justifiable factors.
= The balancing test (Article 6 FSR). The Guidelines explain the Commission’s process of weighing the negative effects of a distortive foreign subsidy against any possible positive effects. The Commission will only take into consideration positive effects that are specific to the foreign subsidy under assessment. The balancing will take into account the severity of the distortion and whether the positive effects can be achieved without the distortion. If the positive effects outweigh the negative ones, the Commission will not object. If not, the Commission may accept commitments or impose redressive measures. The Guidelines provide examples of the relevant evidence that can be submitted and illustrate how the Commission would carry out the balancing test.
= Use of call-in mechanism for concentrations and public procurement procedures (Articles 21(5) and 29(8) FSR). The Commission can request the prior notification of non-notifiable concentrations, as well as foreign financial contributions in public procurement procedures when certain conditions are met, in particular where it suspects that foreign subsidies have been granted to relevant undertakings in the last three years. The Commission evaluates whether an ex-ante review is warranted based on factors such as the competitive impact of the concentration or public procurement procedure, whether it concerns a strategic economic activity, and the possibility of a distortion. The Guidelines include new safe harbors: low-value public procurement procedures, subsidies below €4 million, and subsidies addressing certain extraordinary circumstances are exempt from a call-in. However, the Commission must act before the concentrations have been fully implemented or contracts awarded.
Commission’s opinion
Teresa Ribera, Executive Vice-President for Clean, Just and Competitive Transition means that with the release of the FSR’s Guidelines, the EU is “giving organisations a clear and practical way to turn good intentions into action; the guidelines set out shared expectations for responsible decision-making, so investments can move forward in a way people can trust”.
Stéphane Séjourné, Executive Vice-President for Prosperity and Industrial Strategy added that the EU’s goal was “to ensure that European companies compete on a level playing field”. Therefore, the new guidelines are “providing clarity” in addressing distortive effects of foreign subsidies in public tenders. Besides, by “aligning EU procurement procedures with the principles of merit and fair play” the EU is protecting the Single Market and ensuring that public investments continue supporting EU-wide industrial leadership and competitiveness.
Main reference and citations: https://ec.europa.eu/commission/presscorner/detail/en/ip_26_43