EU: Football the (un)intended consequence of the FSR. Is public procurement next?

In an attempt to bridge the “regulatory gap” of foreign subsidies which impact the EU internal market, the EU adopted recently its Foreign Subsidies Regulation (the “FSR”). The European Commission is also expected to adopt in the next months an Implementing Regulation to provide further guidance on the enforcement of these rules. This new set of rules seek to combat foreign subsidies facilitating acquisitions of EU undertakings and the bidding in EU public tenders to the detriment of fair competition. For that purpose, the FSR provides a mandatory notification and approval regime for acquisitions of EU undertakings and EU public procurement procedures that exceed certain quantitative thresholds. It also allows the European Commission to examine, impose remedies and, where appropriate, order the repayment of the foreign subsidies received, even when the concentrations or public procurement contracts do not take place ultimately. The notification requirements will be applicable as of 12 October 2023 to both third-country-based companies and EU-based companies.

An overdose of control of foreign subsidies may not be the right cure. Indeed, even though the FSR has not fully entered into force it has already been wielded against so-called “financial doping” distorting football competition. Last week Belgian club Royal Excelsior Virton lodged a complaint before the European Commission against its competitor SK Lommel, who recently received a capital injection of EUR 16.8M from the Emirate of Abu Dhabi which allowed the club to obtain its professional licence from the Belgian Football Federation for the 2023-2024 season. In its complaint, Royal Excelsior Virton invites the European Commission to use the new powers granted to it in the FSR to put an end to the foreign subsidies distorting the professional football market.

Such complaints are likely to happen in the field of EU public procurement, where the stakes to win multi-million EUR contracts are very high.

Notification by undertakings participating in large tenders in the EU

Articles 28(1) and 28(2) of the FSR impose burdensome mandatory prior notification of foreign subsidies to all participants in public procurement procedures . Public bidders must notify all financial contributions received from a third country in the three previous years when the following conditions are met:

• The tenderer is submitting a bid for a contract of EUR 250M or more. If the contract (of minimum EUR 250M) is divided into lots, the tenderer is submitting a bid for a lot (or lots) of EUR 125M or more.
• The tenderer (including its subsidiary companies without commercial autonomy, its holding companies, and, where applicable, its main subcontractors and suppliers involved in the same tender) was granted foreign aggregate financial contributions of more than EUR 4M per third country in the three financial years prior to the notification.

The notion of "financial contributions” encompasses all contributions provided directly or indirectly by a third country, which confer a benefit, and which are limited to one or more undertakings or industries. According to the FSR, a financial contribution by a third country includes inter alia (i) the transfer of funds or liabilities (such as capital injections, grants, loans, loan guarantees or fiscal incentives); (ii) the foregoing of revenue that is otherwise due (such as tax exemptions or special or exclusive rights without adequate remuneration); or (iii) the provision of goods or services or the purchase of goods or services (Article 3). Not so obvious financial contributions are likely to be: lower airport charges, favourable lending terms by a public bank, preferential credit insurance, etc.

When the criteria set forth in Articles 28(1) and 28(2) of the FSR are not met (e.g., below the EUR 4M threshold), tenderers are still obliged by Article 29(1) to list in a declaration all the foreign contributions received and confirm that those foreign financial contributions are not notifiable in accordance with Article 28(1) point (b).

Following the receipt of a complete notification from a bidder, the European Commission will perform a preliminary review of the information provided. This preliminary review may not last more than 20 working days unless the circumstances justify an extension of 10 more working days. During the preliminary review, the European Commission may decide to start an in-depth investigation with a duration of up to 110 days after the receipt of the complete notification. This period may be extended by 20 working days in duly justified cases . The FSR allows the European Commission to submit requests for information and carry out inspections (Article 30(1) in connection with Articles 10, 13, 14 and 15). While preliminary reviews and in-depth investigations are ongoing, contracting authorities may continue with all procedural steps except the award of the contract (Article 32(1)).

Where pursuant to an in-depth investigation the European Commission finds that a tenderer has obtained foreign subsidies distorting the internal market, it may either impose redressive measures on the tenderer or accept commitments offered by the undertaking concerned. These redressive measures or commitments may consist of the repayment of the foreign subsidies received, including an appropriate interest rate (Article 7).

The FSR provides for the possibility to sanction the bidder in case of non-compliance. These sanctions include:

• Fines (of up to 1% of the undertaking’s turnover) and periodic penalty payments (of up to 5% of its average daily aggregate turnover) (Article 17). The latter include sanctions for:
  • Supplying incomplete, incorrect or misleading information in response to a request for information, or not supplying the information within the prescribed time limit;
  • Producing the required books or other records in incomplete form during inspections;
  • Not answering or answering incorrectly questions asked by the European Commission in an inspection;
  • Refusing to submit to inspections or breaking the seals or failure to comply with the conditions for access to the file or the terms of disclosure.
• Additionally, Article 33 FSR also empowers the European Commission to impose fines specific to public procurement procedures:
  • Up to 1% of their turnover in the previous year on those companies that intentionally or negligently supply incorrect or misleading information in a notification or declaration.
  • Up to 10% of their turnover in the previous year on companies who, intentionally or negligently, (i) fail to notify foreign financial contributions, or (ii) circumvent or attempt to circumvent the notification requirements.

The FSR allows Member States and any legal or natural persons to report to the Commission any foreign financial contribution not properly declared (Article 29(7) FSR). These would-be complainants may comprise competing bidders, who have an interest in making it difficult for other tenderers to win the contract. In case of successful complaint, the European Commission is entitled to adopt a Decision prohibiting the award of the contract and the contract authority shall reject the tender (Article 31(2)).

The substantial burden imposed on public tenderers

The notification regime foreseen in the FSR will cause serious difficulties and, likely, inefficiencies that may render the rules unworkable in practice. The broad scope of the notifiable information will result in an unbearable information-gathering burden on participants which will be required to invest a significant amount of time and resources to comply with these rules. The following are examples where the FSR will trigger serious constraints:

• First, the definition of financial contribution provided for in the FSR is extremely broad and even though Article 3 of the FSR foresees some examples, the list provided therein is not exhaustive. This creates uncertainty for public tenderers who will be expected to assess at their risk whether any of the benefits they received in the three years preceding the notification constitute a financial contribution.
• Second, it follows from of Article 29 FSR that even when the qualitative cumulative thresholds are not met, tenderers will still be bound to declare all foreign financial contributions received.
• Third, the EUR 4M threshold for notification is relatively low when the tenderer is a large company with substantial costs. In those circumstances, an EUR 4M foreign subsidy is unlikely to distort the internal market. However, these companies still have to invest time, effort and resources to collect the data requested by the FSR.
• Fourth, the notification obligation extends to subsidiaries without commercial autonomy and to holding companies, and main subcontractors and suppliers involved in the same tender. This is particularly grievous for the following reasons:

(i) Companies will have to gather an extensive amount of information from their subsidiaries and holding companies. The amount of time and resources necessary to perform such tedious task may render the public tender unattractive.

(ii) The FSR is very imprecise when defining the notions of main subcontractor and main supplier. While the FSR foresees a concise quantitative criterion to define these concepts —that the economic share of their contribution exceeds 20 % of the value of the submitted tender— it leaves the definition open by including an excessively abstract qualitative criterion —that their participation ensures key elements of the contract performance— . This legal uncertainty will ultimately affect public tenderers who may likely notify unnecessary information in order to avoid the risk of sanctions foreseen in Article 33 FSR.

Risks arising from the reporting system: the whistleblowers’ race

Not only does the FSR provide for a complex and inefficient notification system, but it also foresees the possibility for any natural or legal person to report about foreign financial contributions received by any competing tenderer. While the FSR provides for the possibility to complain about foreign subsidies received by tenderers, it does not establish any penalties in case of unfounded accusations. Thus, the FSR reporting system may likely trigger unfounded cross-complaints between competitors. Consequently, the Commission may not only have to review all the information included in tenderers’ notification, but it may also have to examine unfounded allegations from competitive tenderers.

In conclusion: likely reduced competition in public procurement procedures?

Several voices, including those of trade associations, associations of lawyers or some of the most important companies operating in the EU internal market, have already spoken up, calling out the astounding notification obligations imposed by the FSR. These have been considered as “not workable in practice” due to the unduly burden they entail.

The practical implications of the newly adopted legal regime may likely impact negatively on EU public procurement. The administrative burden imposed by the FSR on undertakings will likely impact their willingness to submit bids for EU public procurement contracts. As a result, less competitive bids will likely be submitted and awarded, resulting in increased costs for the public treasury.

Moreover, the amount of information that will be notified for every public procurement procedure will force the European Commission to invest significant time and resources for its review. This process will probably result in significant delays in the granting of awards.

Some alternative approaches to achieve an equitable solution

To avoid the placement of an excessive administrative burden on undertakings and on the Commission’s own services, as well as the resulting negative consequences, several changes might be appropriate. These could include:

1. Adoption of rules governing the whistleblower system to guarantee its well-functioning.
2. Publication of clear and concise guidelines on the notion of financial contribution.
3. Withdrawal of the declaration obligation below the notification thresholds.
4. Limitation of the scope of notifiable foreign subsidies to include only those most likely to distort competition.
5. Removal of the qualitative criterion to define the notions of main subcontractor and main supplier.
6. Notification waivers with specific guidance on how to be granted. The Draft Implementing Regulation already foresees such possibility in Article 5(5). However, it does not provide clear rules on how to qualify for it.

For more information, please contact José Rivas, Paula González Alarcón or Ignacio Villalba Navarro.

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[1] Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market.

[2] See letter of 24 March 2023 by 21 leading companies to several EU Commissioners and Director Generals on the implementation of the Foreign Subsidies Regulation

[3] Note that the procedural rules governing multi-stage procurement procedures are different. In the event of a request to participate in a multi-stage tender, the Commission must examine the complete notification submitted by the tender within 20 working days from its receipt. Once these 20 working days have elapsed, the Commission must suspend the preliminary review until a final tender is submitted. In that moment, the preliminary review shall be resumed, and the Commission has 20 working days to finalise it. If the Commission decides to start an in-depth investigation, it must adopt a decision within 90 working days from the submission of the completed updated notification (Article 30(6) of the FSR).

[4] Recital 54 of the FSR foresees that “[e]lements of the contract can be considered to be key elements, in particular, on the basis of the specific relevance of the element to the quality of the tender including specific know-how, technology, specialised staff, patents or similar advantages available to the subcontractor or supplier, especially where those elements are relied upon for fulfilling the majority of at least one of the selection criteria in a public procurement procedure”. Even though this guidance may help tenderers to assess when a subcontractor or a supplier may qualify as “main subcontractor” or “main supplier”, it still leaves the definition of “key elements” open and uncertain.