The EU Foreign Subsidies Regulation public procurement tool – key takeaways after the first year of application

We take the first anniversary of the EU Foreign Subsidies Regulation (FSR) as an opportunity to reflect on the EC’s enforcement under the public procurement tool which is one of the three pillars of the FSR. Key takeaways after one year include: 

• More public procurement procedures than initially expected by the European Commission (EC) fall within the scope of the FSR. While the EC expected around 30 public procurement notifications per year, it has received more than 800 FSR public procurement notifications / declarations in its first year.
• The EC is making full use of its new powers under the FSR public procurement tool, having already opened three in-depth investigations (Phase 2 investigations) in two public procurement procedures (although these investigations were subsequently closed, as the bidders withdrew their bids).
• Companies should assess early whether a tender requires a FSR notification to avoid missing a mandatory FSR filing. A number of public authorities still lack experience with the FSR and there have been instances in which tender notices do not refer to the obligation to submit a FSR notification / declaration.
• Companies need to be prepared to provide the data for a FSR notification / declaration, as collecting the relevant data can be time-consuming. In that context, companies should carefully consider which group companies are in scope of their notification obligations.

More than expected - a significant number of public procurement procedures fall within scope of the FSR 

As a reminder, since 12 October 2023 economic operators that participate in public tenders by EU Member States which meet specific thresholds (in particular that the value of the public procurements must exceed EUR 250 million) have to submit mandatory FSR notifications or declarations. 

Before the FSR entered into force, the EC estimated that it would receive around 30 public procurement notifications per year. Similar to the FSR M&A tool, this figure was largely underestimated. By the end of July 2024, it is reported that the EC received more than 800 notifications and declarations and, according to data from Tenders Electronic Daily, more than 500 public procurements exceeded the EUR 250 million FSR threshold.

The tables below provide an overview of public procurements that exceeded the EUR 250 million FSR threshold by Member State and sector. These data show that the FSR notification / declaration obligation is more prevalent in some sectors and countries. In particular for companies in those sector, it is key to be aware whether the tenders they participate in require an FSR notification / declaration. 

Sectors commonly requiring FSR notifications / declarations include certain infrastructure projects or transport, where projects tend to be large, but also healthcare, where statutory health insurers often tender large volumes at once. Further, large volume tenders are more common in countries where contracting authorities employ more centralized procurement systems (e.g. France or Italy which accounted for more than one third of all tenders triggering FSR notifications).

Figure 1: Overview of public procurement procedures over EUR 250 million by EU Member State

Figure 2: Overview of public procurement procedures over EUR 250 million by sector

The EC is making full use of its new powers under the public procurement tool 

In the first year of application of the FSR, the EC has already opened three Phase 2 investigations in two public procurement procedures (see here for our previous blogposts on these procedures). These include China Railway Rolling Stock Corporation’s participation in a Bulgarian rail procurement and Shanghai Electric and a consortium’s (the consortium is composed of Romania’s Enevo Group and a German subsidiary of a Chinese company) participations in solar tender bids. While all Phase 2 investigations under the public procurement tool have so far focused on Chinese companies, we would expect that over time the EC will also focus on links to other countries. 

Although all in-depth investigations have now been closed, the EC’s summary notices inviting stakeholders to submit comments on the investigations provide some valuable insights into the EC’s enforcement priorities:

• The EC may open a Phase 2 investigation even if the bidder has not received any ‘most likely distortive’ foreign financial contributions (FFCs) - a narrow category of FFCs enumerated in Article 5 FSR. In fact, two of the Phase 2 investigations that were initiated did not involve such FFCs. The fact that a business has not received any such FFCs does therefore not in and of itself determine the FSR notification has a low risk profile. 
• The EC will consider whether the amounts of reported FFCs are higher than the value of the tender a notifying party is bidding for. This was the case in all Phase 2 investigations. In particular where companies have received high amounts of FFCs, they should provide sufficient proof that the FFCs are not foreign subsidies and provide sufficient details on the specific nature, conditions, purpose and use of the FFC.

The EC has also recently shed more light on the framework it uses to assess whether a tender is likely to distort competition in a Staff Working Document published on 26 July 2024 (see here for our more detailed blogpost which contains a summary of the Staff Working Document): the EC first examines whether the tender is unduly advantageous – notably compared to other bids – and then looks at whether there is a link between the foreign subsidies granted and the undue advantage. 

Companies need to be prepared for the FSR public procurement tool

This initial experience underlines the importance for businesses contemplating to participate in public procurement procedures that may meet the FSR thresholds to prepare carefully for any FSR notification / declaration.

Relevant steps to consider include: 

• Start collecting FFC data early. Bidders should frontload screening for FFCs and establish an internal register to regularly track FFCs. This is important to identify (1) whether a notification or declaration must be submitted and (2) which FFCs need to reported (note that reporting obligations are not the same for notifications and declarations). Moreover, the FSR risk assessment will mainly depend on the FFCs received.
• Know the difference vis-à-vis the reporting obligations in FSR notifications under the M&A and public procurement tool as important differences exist: 
  • Identify which group companies fall within scope. Information needs to be collected on the FFCs received by the bidder as well as its holding companies and subsidiaries without commercial autonomy. This can create practical difficulties as the EC has not provided a clear description of when a subsidiary has no “commercial autonomy”.
  • Identify contractors and suppliers. Information needs to be collected on the FFCs received by the bidder’s “main” sub-contractors and suppliers. In practice, it can be challenging to gather the relevant information from these suppliers and sub-contractors within the timeframe of the procurement procedure. This is particularly the case for non-EU based suppliers and sub-contractors who, so far, may have had very little exposure to EU procurement law requirements and who may initially be reluctant to share commercially sensitive data with their customer. 
• Ensure that no mandatory filing is missed. Companies should review whether the public tenders they intend to participate in require FSR notifications or declarations. While contracting authorities are obliged to state in the contract notices or in the procurement documents that bidders are subject to mandatory FSR notifications or declarations, a failure to do so does not relieve economic operators of their obligations to notify. In practice, many contracting authorities are now aware of the FSR but in our experience, some are not. To avoid missing a mandatory FSR filing, we recommend that businesses test themselves whether a FSR notification/declaration is required.

Please reach out to us if you have additional questions on the FSR public procurement tool or if you would like assistance in preparing your business for the FSR more generally.