Public Procurement & Government Contracts 2023

The Public Procurement & Government Contracts 2023 guide covers 14 jurisdictions. The guide provides the latest legal information on the entities and types of contracts subject to procurement regulation, tender procedures, evaluation criteria, transparency obligations and review procedures.

Last Updated: April 14, 2023

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Pinsent Masons has one of the largest and most dynamic procurement practices in the UK and Europe. It spans all major sectors, including regeneration, defence, transport, energy, water and infrastructure, and advises regulated procurers as well as suppliers bidding for public or regulated utility contracts. The practice is recognised for its ability to provide practical and commercially focused advice on complex procurements across the UK and abroad. Contentious and non-contentious procurement lawyers in the team work closely together to ensure that clients are provided with innovative strategic advice that anticipates and minimises legal risks. The team covers a diverse range of matters, including all aspects of procurement regulation in the highly specialised defence sector, utility procurements in the transport, energy and water sectors, major central government procurements and local authority, health and education sector procurements. The team also advises clients on all aspects of the World Trade Organization’s plurilateral Agreement on Government Procurement.


The EU Foreign Subsidies Regulation (FSR) – A Laudable Aim Achieved Through Burdensome Means

Subsidies granted by EU member states are tightly regulated under the EU State aid rules. EU state subsidies are prohibited unless they are first notified to, and authorised by, the European Commission or a notification exemption applies. The intention behind such strict regulation is to ensure that undue distortions of competition in the EU internal market are avoided and subsidies are granted only where these are necessary to address a market failure or certain common interest objectives. At the same time, up until now, EU law left third-country subsidies unchecked despite the fact that these can also distort competition if the beneficiary is investing or providing goods or services in the internal market.

The FSR, which entered into force on 23 January 2023, and which will start applying from 12 July 2023, aims at closing this regulatory gap. It seeks to do so by providing the European Commission with powers to screen, and ultimately take action against foreign financial contributions which might constitute subsidies that can distort the level playing field in the EU. To facilitate the screening process, as of 12 October 2023, the FSR will create notification obligations on businesses operating or investing in the EU that are the recipients of foreign financial contributions.

This note provides a brief overview of certain key aspects of the new legislation that are of particular relevance to the conduct of public procurements in EU member states.

New control tools for the Commission

Under the FSR, the European Commission will have power to review:

  • M&As of at least EUR500 million which involve businesses that have received foreign financial contributions greater than EUR50 million;
  • EU public procurements that relate to the award of public contracts of at least EUR250 million that involve the participation of businesses that have received foreign financial contributions of at least EUR4 million per non-EU country (discussed in more detail below);
  • “All other market situations”, which might include completed M&A transactions or public procurements, where the Commission can start investigations on its own initiative (ex-officio) if it suspects that these involve distortive foreign subsidies that have been granted within the previous ten years (but also, as a transitional provision, within five years from 23 July 2023).

Within-scope procurements

Subject to a few exceptions, the FSR’s public procurement-specific rules apply to the procurement procedures that are subject to the Public Sector Directive (Directive 2014/24/EU), the Utilities Directive (Directive 2014/25/EU), and the Concessions Directive (Directive 2014/23/EU).

In relation to procurements that are subject to the Defence Directive (Directive 2009/81/EC), only the ex officio review provisions apply, unless the contract was awarded on the basis of an exemption from the Defence Directive, in which case the contract award falls entirely outside the FSR’s scope.

Public procurement notification thresholds, related obligations and Commission powers

In more detail, in relation to public procurements, notification obligations are triggered when:

(a) the estimated value of the procurement (excluding VAT) is at least EUR250 million (but, if the procurement meets this threshold overall but is subdivided into lots, notification is only required from economic operators who apply for an aggregate value of lots of at least EUR125 million); and

(b) the economic operator (including affiliate companies, main subcontractors and suppliers involved in the tender) was granted aggregate financial contributions in the three years prior to the commencement of the procurement of at least EUR4 million per foreign country.

Where both conditions are met, the economic operator participating in a public procurement procedure has an obligation to notify to the relevant contracting authority or contracting entity all the foreign financial contributions that fall within the scope of (b) above.

In all other cases, economic operators are required to list in a declaration all the foreign financial contributions they have received and confirm that these do not meet the conditions in (b) above and are, therefore, not notifiable.

Following the submission of the notification or declaration, the contracting authority or contracting entity in question has an obligation to forward this to the European Commission without delay.

In a procurement conducted pursuant to the open procedure, the economic operator must submit its notification or declaration only once, when submitting its tender. For multi-stage procedures, the submission must be made twice, first with the request to participate in the contract award procedure and then again with the tender or (where the process provides for multiple bidding rounds) the final tender submission in the form of an updated notification or declaration.

Separately, even where these notification thresholds are not met, where the Commission suspects that an economic operator may have benefitted from foreign subsidies in the three years prior to the submission of a tender or request to participate in a contract award procedure, it may request, before the award of the contract, the notification of all the foreign financial contributions that the economic operator has received.

Definition of financial contribution and foreign subsidy

In terms of the “financial contributions” that need to be notified or declared, these are defined broadly and include the transfer of funds or liabilities, the foregoing of revenue that is otherwise due, or the provision or purchase of goods or services.

A financial contribution “provided by a third country” includes a financial contribution provided by any public authority, or any public or private entity the actions of which can be attributed to a third country. It is noteworthy that this definition is sufficiently broad to capture normal day-to-day business activities. For example, any income received from selling goods or services to public sector entities in non-EU countries would meet the definition of third country financial contribution.

As to the definition of a “foreign subsidy”, this will be deemed to exist where a third country provides, directly or indirectly, a financial contribution which confers a benefit on a business that engages in an economic activity in the internal market and which is limited, in law or in fact, to one or more businesses or industries.

Commission powers of investigation and remedial action

Once a notification has been received, the Commission will carry out a preliminary review to determine whether to open an in-depth investigation to determine whether the foreign subsidy distorts the internal market. Where it concludes that it does, it will assess whether the foreign subsidy’s positive effects on the development of the relevant subsidised economic activity outweigh the subsidy’s distortive effects, in which case no further action would normally be necessary. However, where the negative effects outweigh the positive effects, the Commission will have the power to impose redressive measures or accept commitments from the companies concerned to remedy the distortion.

Commission review timelines

Where the notification relates to an open procedure, the Commission will carry out a preliminary review within 20 working days of receiving a complete notification. This period can be extended by ten working days in “duly justified cases”. Where the Commission commences an in-depth investigation, this must then be completed within 110 working days – a period which includes any time spent on the preliminary review. This period can also be extended by 20 working days in “duly justified exceptional cases”.

In respect of multi-stage procedures, the preliminary review must also be conducted within 20 working days following the receipt of a complete notification submitted with the request to participate. The Commission will then pause the preliminary review until the receipt of an updated complete notification that would have been submitted with the final tender. The Commission then has a further 20 working days to resume and complete its preliminary review, taking into account any additional information that might have been submitted. If the Commission decides to conduct an in-depth investigation, it has 90 working days, from the submission of the completed updated notification to conclude the investigation.

During the Commission’s preliminary review and any subsequent in-depth investigation, the procurement may may continue, with the exception that the contract cannot be awarded to the economic operator who is still being investigated.

Remedies and penalties

An economic operator risks being disqualified from the procurement if it fails to submit a declaration or notification, or if it submits an incomplete one.

Where, following an in-depth investigation, the Commission finds that an economic operator benefits from a foreign subsidy which distorts the internal market and the economic operator offers “commitments that fully and effectively remedy the distortion”, the Commission will adopt an implementing act to make those commitments legally binding.

Economic operator commitments (or, where relevant, redressive measures) may consist of:

  • offering access under fair, reasonable, and non-discriminatory conditions to infrastructure that was acquired or supported by the foreign subsidies;
  • reducing its capacity or market presence, including by means of a temporary restriction on commercial activity;
  • refraining from certain investments;
  • licensing on fair, reasonable and non-discriminatory terms, assets acquired or developed with the help of foreign subsidies;
  • publishing the results of R&D; and
  • repaying the foreign subsidy, including an appropriate interest rate.

The FSR also makes it clear that none of these measures can result in a tender (or final tender) modification that is incompatible with EU law requirements. Accordingly, subject to this requirement, tender modifications would in fact be possible, if these can remedy fully and effectively the distortion of competition.

Where the economic operator fails to offer adequate or any commitments, the Commission will adopt an implementing act prohibiting the award of the contract to that economic operator.

Separately, the FSR grants powers to the Commission so that it may impose fines or periodic penalty payments in certain circumstances. For example, where an economic operator supplies incorrect or misleading information in a notification or declaration, this can lead to a fine of up to 1% of the economic operator’s aggregate annual turnover. Separately, where an economic operator fails to notify foreign financial contributions during a public procurement procedure or seeks to circumvent notification requirements, this can lead to fines of up to 10% of the economic operator’s aggregate annual turnover.

Comment

It is hard to deny the legitimacy of the legal concerns that underlie the introduction of the FSR. EU businesses are subject to the strictest subsidy-control requirements in the world. As noted earlier, EU state aid rules seek to ensure fair competition in the internal market, keeping any distortions of competition that are brought about by necessary state aid interventions to the absolute minimum. In this context, it would seem unfair that foreign subsidy beneficiaries could bypass such strict controls and gain a competitive advantage whilst investing and operating freely in the internal market.

At the same time, there is no denying that compliance with the FSR introduces an additional substantive administrative burden on businesses (whether EU-owned or foreign) that provide, or seek to provide, goods or services in the internal market. In relation to public procurement, for example, as we have seen, economic operators would have to keep track of all financial contributions that they have received over the proceeding three-year period so that they may determine whether a notification or declaration might be necessary and if so, ensure that this is completed accurately.

Given that the definition of financial contribution is so broad as to encompass day-to-day business transactions, this obligation appears to be particularly burdensome. Indeed, it is notable that in the context of the Commission’s recent consultation on the draft FSR implementing regulation, the feedback from businesses and other stakeholders seems to have been unanimous in raising concerns about the seemingly disproportionate amount of information that businesses would need to monitor and collect in order to ensure compliance with FSR requirements.

Separately, at least in cases where the Commission initiates an in-depth investigation, this could lead to delays in the award of contracts, potentially affecting the (timely) delivery of crucial services or the commencement of projects.

Whether the FSR could have pursued its objectives through less burdensome means is open to question. In this respect, it is important to remind ourselves that the FSR has been the outcome of a relatively protracted process, commencing with the publication of a Commission White Paper on foreign subsidies in June 2020, and involving public consultations as well as lengthy negotiations between member states as well as at an inter-EU institutional level.

Ultimately, the full extent of the additional administrative burden imposed on businesses by the FSR can only be accurately assessed once the legislation is fully implemented. In this regard, it is also notable that the FSR requires the Commission to report “by 13 July 2026” and every three years thereafter, to the European Parliament and the Council, on the implementation and enforcement of the FSR and “where appropriate” combine this report with legislative proposals for amending (or even revoking) the legislation.

Current indications suggest that proposals to amend key aspects of the FSR, such as the thresholds that trigger notification or declaratory obligations, or the definition of financial contributions, could be forthcoming sooner than the 13 July 2026 deadline.

Author



Pinsent Masons has one of the largest and most dynamic procurement practices in the UK and Europe. It spans all major sectors, including regeneration, defence, transport, energy, water and infrastructure, and advises regulated procurers as well as suppliers bidding for public or regulated utility contracts. The practice is recognised for its ability to provide practical and commercially focused advice on complex procurements across the UK and abroad. Contentious and non-contentious procurement lawyers in the team work closely together to ensure that clients are provided with innovative strategic advice that anticipates and minimises legal risks. The team covers a diverse range of matters, including all aspects of procurement regulation in the highly specialised defence sector, utility procurements in the transport, energy and water sectors, major central government procurements and local authority, health and education sector procurements. The team also advises clients on all aspects of the World Trade Organization’s plurilateral Agreement on Government Procurement.