EU tools addressing foreign subsidies: Foreign Subsidies and Public Procurement – the tension in protecting both contracting authorities and EU contractors

The European Commission’s White Paper on levelling the playing field as regards foreign subsidies (see here) looks at neutralising the potentially distortive effects of foreign subsidies on EU procurement markets.

EU public procurement rules are agnostic to the origin of contractors, with EU procurement markets largely open to third country bidders. But where such bidders receive foreign subsidies, not subject to the checks and balances of EU State aid rules, this could lead to significant distortions and put non-subsidised players at a disadvantage.

Consequently, there is a tension between ensuring best value for money for contracting authorities (given foreign subsidies may result in lower bids, reducing the public budget) and ensuring a genuine level playing field for bidders.

This is a difficult balance to strike and, as public procurement rules and processes can sometimes be quite onerous, the White Paper proposals will need to be mindful not to add unnecessary red tape.

The proposals in more detail

The key features of the proposals are as follows:

Notification obligation for foreign subsidies:
  • All contractors participating in a public procurement process would be obliged to notify the contracting authority where they have received a foreign subsidy in the last three years or expect to receive a foreign subsidy during the contract term. It is anticipated that there will be certain thresholds and time limitations for this self-notification, but details are yet to be decided.
  • The Commission envisages significant sanctions for non-compliance including fines and possible exclusion, with the possibility for third parties to also inform on bidders who “miss” notifications.
  • The obligation to notify would extend to consortium members, subcontractors and suppliers. This would undoubtedly place an additional burden on bidders and goes further than self-certification of exclusion grounds under procurement rules (which ordinarily apply only to the bidding entity and entities relied on to meet the selection criteria).
Investigation and interaction with public procurement process:
  • The existence and impact of subsidies would be reviewed by a separate national supervisory authority distinct from the contracting authority. During the investigation, the contracting authority would be barred from awarding the contract to the investigated contractor.
  • Naturally, this could impact the timetable of any public procurement and so the Commission has proposed strict time limits to ensure procurements are not materially delayed: 15 working days for first stage review and 3 months for in-depth review.
  • If there is a foreign subsidy, the task of assessing the distortive effect would then fall to the contracting authority. The authority must determine whether the subsidy has distorted the procurement process by reference to “uniform methodology”.
Consequences of investigation:
  • If such distortive effect exists, the contractor would be excluded from the procurement in question and may be excluded from future procedures for up to 3 years.
  • The remedies available to an excluded contractor are not yet clear and will likely be determined under national laws. The White Paper does however suggest that contractors would have the opportunity to demonstrate they no longer benefit from a distortive foreign subsidy allowing them to participate in future tenders (but not it seems the tender where the notification was made prompting the exclusion).
  • It also remains to be seen whether, in situations where the recipient of the distortive foreign subsidy is, for example, a subcontractor, it could simply be replaced, allowing the prime bidder to continue to compete in the ongoing tender.
A true level playing field?

The proposal aims to level the playing field, but public procurement rules do not currently mandate the exclusion of bidders in receipt of incompatible State aid. The interplay between the proposed exclusion ground and EU State aided companies is as yet unclear, with the Commission noting only that its effect on equal treatment “will have to be considered”.

Looking beyond the EU

The Commission’s proposal may provoke reaction from third countries, coming at a time when the EU is seeking to encourage third countries to open their procurement markets to EU business through the International Procurement Instrument. Any reciprocity measures from third countries could have a significant effect on EU companies which have benefited from Covid-19 aid schemes and are seeking to bid for public contracts in third countries.

Additionally, an assessment of the interplay of the proposal with the WTO’s Government Procurement Agreement and bilateral FTAs appears to be very much work in progress. There is however at least an acknowledgement that any exclusion ground for foreign subsidies will need to ensure compatibility with the EU’s obligations under the GPA and similar public procurement provisions of FTAs.

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