On June 17, the European Commission proposed new legal instruments to address distortions caused by foreign subsidies. One is a general market security instrument; a second focuses on foreign subsidies that facilitate the acquisition of EU companies and the third addresses the harmful effect of foreign subsidies on public procurement in the European Union. The Commission provides the assurance that the new rules will comply with the EU’s international obligations, including the Government Procurement Agreement (GPA). This post examines the proposed mechanism for addressing foreign subsidies in procurement, in particular in terms of GPA requirements.

The proposed measures have wide application. They will apply equally to all non-EU countries and to broadly defined foreign subsidies. The Commission’s White Paper defines a foreign subsidy as any financial contribution by a government or public body of a non-EU State, including interest-free loans, unlimited guarantees, grants, capital injections, preferential tax treatment, tax credits, and even “the provision of goods or services or the purchase of goods and services.” 

According to the Commission, the EU’s existing public procurement rules are not sufficient to address and remedy distortions caused by such subsidies. It contends that foreign subsidies can have a harmful effect on the conduct of EU public procurement by enabling bidders to win contracts with bids below market price or even below cost, to the disadvantage of European firms. 

The Commission proposes a four-step process to identify and neutralize foreign subsidies in public procurement. It begins with a “compulsory notification” by all tenderers that submit a bid in a EU public procurement of whether they (or any of their consortium members, subcontractors or suppliers) have received a foreign subsidy from non-EU countries.

The notification must include: (i) legal information, including ownership and governance of the tenderer, any consortium member and subcontractors and suppliers that received a foreign subsidy; (ii) main sources of overall financing of the tender; (iii) total foreign subsidies received in the prior three years; (iv) foreign subsidies received specifically for the purpose of participating in the procurement; and (v) foreign subsidies that will be received during the expected execution of the contract. 

The Commission warns that self-assessment by bidders of whether they are beneficiaries of foreign subsidies that must be notified “carries a significant risk of error and of deliberate circumvention.” Therefore, third parties and competitors are “entitled to inform the contracting authority that a notification should have been made.”

Step two would be a preliminary review followed by an in-depth investigation, where necessary, to establish the existence of a foreign subsidy. The Commission suggests a 15 working days limit for the preliminary review and three months for the in-depth review. During the investigation, the contracting authority would be barred from awarding the contract to a bidder subject to an investigation.

However, the contracting authority could evaluate the offers (including of the bidder under investigation) and determine to whom the contract should be awarded, without consideration of “a possible distorting foreign subsidy.” If the winning bidder is not a supplier under investigation, the contracting authority could award the contract and conclude the procurement. However, if it determines that the contract should be awarded to the supplier under investigation, it must suspend the procurement procedure during the review of the foreign subsidy. 

One of the questions this process raises is whether the contracting authority would try to avoid determining that the bidder under investigation had the best bid and should be awarded the contract in order to not delay the procurement.

In the third step, the contracting authority determines whether the subsidy has “distorted the public procurement procedure.” If so, in the final step, it sets the penalties. The bidder that received the foreign subsidy must be excluded from the ongoing procurement procedure and could be banned from future procurements, for a period of time, such as three years. 

The Commission acknowledges that the exclusion of bidders would have to be compatible with the EU’s commitments under the GPA. It specifically points to its article on “Conditions for Participation,” which allows suppliers to be excluded from participation in a procurement on "grounds such as" bankruptcy, false declarations, significant or persistent deficiencies in performance under a prior contract, final judgments in respect of serious crimes or other serious offenses, professional misconduct or acts that adversely reflect on the commercial integrity of the supplier or failure to pay taxes. Would receipt of a foreign subsidy fit within these grounds?  

A related question is whether the Commission's notification requirement would be consistent with the GPA's limitation of conditions for participation to “those that are essential to ensure that a supplier has the legal and financial capacities and the commercial and technical abilities to undertake the relevant procurement?” 

The Commission's questionnaire for stakeholders providing input includes the key question: whether “there is a need to address specifically distortions caused by foreign subsidies in the specific context of public procurement procedures?” Another question is whether contracting authorities have the necessary expertise to determine whether a foreign subsidy distorts a procurement process?

The Commission will receive public comments on its proposal until September 23, 2020. Then, based on the results of the public consultation, it will conduct an “impact assessment,” with the aim of introducing a new regulation in 2021.

Jean Heilman Grier

June 23, 2020

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