FSR in Public Procurement: An EC’s Success Story?

Since 2024, the European Commission (Commission or EC) has increased its investigative activities under the Foreign Subsidies Regulation (FSR). This article provides a brief overview of the Commission’s latest FSR activities that are relevant for the public procurement sector. We first introduce the concept of FSR in relation to public procurement. Next, we discuss the latest FSR in-depth investigations in public procurement cases, followed by the latest EC guidance. Finally, we conclude that verification under the FSR has become indispensable whenever foreign subsidies or financial contributions are or may be involved when tendering for public contracts.

Introduction to FSR in relation to public procurement

Within in the European Union (EU), subsidies are subject to EU State aid rules, but subsidies or financial contributions from a third country are not under scrutiny from the Commission whilst such subsidies can create an (unduly) advantage to companies receiving such subsidies and operating on the EU market. The FSR aims at creating a level playing field for all companies operating in the internal market and to address a distortion of fair competition caused by foreign subsidies. The FSR entered into force on 12 July 2023. While it was declared applicable in stages, it is now fully in force. 

A ‘foreign subsidy’ exists when a direct or indirect financial contribution from a third country provides a selective advantage to a company that carries out an economic activity in the internal market. A ‘financial contribution’ encompasses various financial supporting mechanisms, i.a. funds, fiscal incentives, loans, grants, tax exemptions, compensation schemes, capital injections etc. Subsequently, ‘foreign financial contributions’ refers in short to financial contributions provided by public authorities from a third country or other entities whose actions can be attributed to the third country. Given the requirement of a ‘selective advantage’, the term ‘foreign subsidy’ has a narrower scope than ‘foreign financial contributions’. 

The FSR also applies to certain concentrations and the Commission has quite recently conditionally approved the acquisition of parts of PPF Telecom Group B.V. by Emirates Telecommunications Group Company PJSC (e&) after initiating an in-depth investigation (C/2024/3970). However, the concentration module of the FSR remains out of the scope of this article. Furthermore, the FSR allows the Commission to initiate ex officio investigations into suspected foreign subsidies that distort the internal market.

FSR in public tenders

Since 12 October 2023, companies participating in EU public tenders that meet the FSR’s threshold have an obligation to either notify the contracting authority of any foreign financial contributions or to declare that such contributions do not exceed the threshold.  Specifically, companies must notify the contracting authority in case (i) the estimated value of the contract equals or exceeds €250 million (for lots or individual contracts, the threshold is €125 million) and (ii) where the company has received at least €4 million in foreign financial contributions from at least one third country in the three years preceding the notification.  In principle, the contract notices or tender documents will state that the FSR applies to the tender in question. 

If there are sufficient indications that a company has received foreign subsidies that distort the internal market, the Commission shall launch an in-depth investigation.  During in-depth investigations, the Commission examines whether the foreign subsidy may improve the competitive position of the company under investigation and thereby actually or potentially affect competition in the internal market.  This includes, among other things, whether the foreign subsidy may enable the company in question to submit an unlawfully advantageous bid. 

Upon completion of the in-depth investigation, the Commission may adopt:  

1. a decision containing commitments (in effect, commitments by the company concerned that fully and effectively remedy the distortion of the internal market), 
   
2. a decision prohibiting the award of the contract to the company concerned (the bid in question is then rejected by the contracting authority), or 
   
3. a decision of no objections.

In principle, the Commission has 110 working days from the receipt of the complete notification to issue a final decision. During the investigation, all procedural steps in the public procurement procedure may be completed, with the exception of the award of the contract to the party subject to the investigation. 

Enforcement

If companies fail to comply with their obligations under the FSR, the Commission may impose periodic penalty payments and fines between 1% and 10% of the total turnover achieved in the preceding financial year. This applies, for example, to a failure to notify foreign subsidies meeting the applicable thresholds (as explained above).

Latest foreign subsidies investigations in public procurement 

Bulgarian railways

On 16 February 2024, the Commission announced its first in-depth investigation under the FSR. It concerned a public procurement procedure for the ‘Bulgaria-Sofia: Railway and tramway locomotives and rolling stock and associated parts’ project, which resulted in a negotiated procedure without prior publication. 

The in-depth investigation concerns the foreign financial contributions of the subsidiary company ‘CRRC Qingdao Sifang Locomotive Co., Ltd’ (CRRC) of a Chinese state-owned train manufacturer (CRRC Corporation Limited). The Commission sent CRRC a request for information to which it was required to respond within a very short period of two days only. The request consisted of the following:

i. information on the ownership structure in accordance with Article 28(1)(b) FSR;
ii. information on all foreign financial contributions received by the entities identified under the previous point, when the value of individual financial contribution(s) is equal to or greater than € 4 million in the three years prior to the notification per third country;
iii. information on whether any individual foreign financial contributions of at least €4 million per third country have been granted to any direct or indirect subsidiaries of CRRC Corporation Limited in the three years preceding the notification; and
iv. Relevant annual reports or financial statements for the three years prior to notification.

Based on the information received, the Commission has determined that there are sufficient indications that CRRC has received foreign subsidies within the meaning of Article 3 FSR of at least €4 million. The Commission bases this on the value of government contracts awarded to the CRRC group but not obtained under competitive market conditions (or at least CRRC has not been able to sufficiently demonstrate this), on government subsidies obtained, and the existence of government subsidies other than subsidies closely related to the company's activities. Thus, in the Commission's view, CRRC obtained a specific advantage.

In view of this, the Commission considers that there are sufficient indications that foreign subsidies can improve CRRC's competitive position in the internal market and that, as a result, those subsidies can “actually or potentially affect competition in the internal market” within the meaning of Article 4 FSR. This is i.a. based on the amount of total foreign financial contributions received compared to the value of the bid for the tender in question (in this case, five times the value of the bid). It appears that CRRC withdrew from the procurement procedure because of the in-depth investigation. In response, the Commission closed the investigation and Commissioner Breton, subsequently, stated the following: 

“In just a few weeks, our first investigation under the Foreign Subsidies Regulation has already yielded results. Our Single Market is open for firms that are truly competitive and play fair. We will continue to take all necessary measures to preserve Europe’s economic security and competitiveness – with assertiveness and speed.”

Romanian Solar Park 

On 3 April 2024, the Commission announced two in-depth investigations in the solar energy sector concerning a Romanian public procurement procedure for the design, construction and operation of a solar park in Romania, with an installed capacity of 454.97 MW.

The notifying parties are two consortia, the ‘ENEVO Group – LONGi Solar Technologie Consortium’ (ENEVO) on the one hand, and the ‘Shanghai Electric UK Co. Ltd. – Shanghai Electric Hong Kong International Engineering Co. Consortium’ (Shanghai Electric) on the other hand. One of ENEVO's companies is listed on the Hong Kong Stock Exchange. Shanghai Electric is controlled by a Chinese state-owned company.

According to the summary notice, the Commission preliminary holds that both notifying parties and their holding companies have received foreign subsidies in the three years preceding the notification which conferred a specific benefit to them in the form of:

• Government grants;
  
• Tax refunds, fiscal incentives and levies;
  
• Financing; and, in relation to Shanghai Electric,
  
• Sales of goods and provision of services.

According to the Commission, there are sufficient indications that these foreign subsidies are liable to improve the competitive position of the notifying parties in the internal market and, in doing so, actually or potentially negatively affect competition in the internal market within the meaning of Article 4 FSR. The Commission points out that the absolute amount of these potential foreign subsidies is significantly higher than the value of the contracts for which the notifying parties are bidding. In addition, the notifying parties have not provided information concerning the specific nature, conditions, purpose or use of the potential foreign subsidies. 

Therefore, the Commission considered it justified in these two cases to initiate an in-depth investigation to further assess the foreign subsidies and collect relevant information. The Commission set out to assess whether the foreign subsidies enabled the companies to submit an unlawfully advantageous tender. However, following the announcement of an in-depth FSR investigation, ENEVO and Shanghai Electric decided to withdraw from the tender procedure and the Commission subsequently closed the in-depth investigation.

FSR Guidance by the Commission

On 26 July 2024, the Commission published a Staff Working Document containing initial clarifications on the application of Articles 4(1), 6, and 27 FSR (Staff Working Document). The Staff Working Document is structured as a Q&A document and i.a. related to the concept of distortion, the assessment of distortion and EC’s approach to the balancing test. We highlight the following considerations in relation to the public procurement module of the FSR.

The concept of distortion

• The following two conditions must be met for a foreign subsidy to distort the internal market: 
  

1. The foreign subsidy must be liable to improve the competitive position of an undertaking in the internal market. This condition requires that there is a need to establish a relationship between the foreign subsidy and the economic activities of the company in the internal market. Therefore, it is not sufficient to establish that the company carries out economic activities in the internal market. The link between the subsidy and the internal market can also exist through cross-subsidies activities; and
   
2. The foreign subsidy actually or potentially negatively affects competition in the internal market. The FSR thus not only addresses certain distortions, but also potential distortions. The effects on competition can be assessed in relation to any of the activities in which the beneficiary of the foreign subsidies is, or will likely be, active in the internal market as long as competition in respect to that activity is, or may be, negatively affected by the foreign subsidy.

The assessment of distortion

• In the assessment of a distortion of the internal market in public procurement procedures, the following conditions must be met to establish that the company submitted a bid that is unduly advantageous:

1. The tender submitted by the subsidised economic operator must be unduly advantageous in relation to the works, supplies or services concerned; and
   
2. There must be a link between the granting of the subsidy and the tender, demonstrating that the subsidy caused or risked causing a distortion in a public procurement procedure by enabling the undertaking, directly or indirectly, to submit an unduly advantageous tender.
   

• In relation to the first condition, to determine whether the tender in question is ‘advantageous’, the Commission will need to compare the respective bid with the other bids submitted and with the contracting authority’s own estimate. The Commission may also rely on other relevant facts (i.e. general market information, information provided by competitors etc.). Where the bid has been found to be advantageous, the undue nature of the advantage will be examined. The principles established in EU case law regarding the explanation of prices in the context of the analysis of abnormally low tenders will be similarly applied in this assessment.
  
• The list of indicators included in Article 4(1) FSR shall be taken into account when assessing the existence of distortions in the internal market. This list is neither exhaustive nor mandatory for every case. Each case will be assessed on its merits and the indicators will be used as appropriate.
  
• For subsidies falling under Article 5 FSR (which contains the categories of foreign subsidies that are most likely to distort the internal market), the Commission does not need to perform an assessment based on the indicators set out in Article 4(1) FSR in order to find a distortion of the internal market. However, the company can rebut this presumption.

The balancing test

• The Commission indicates that it does not have substantial experience on the application and interpretation of the balancing test as laid down in Article 6(1) FSR. The balancing test entails that the Commission needs to take into account whether and to what extent the foreign subsidies distorting the internal market have positive effects on the development of the relevant subsidised economic activity on the internal market. 
  
• It is explained that the positive effects on the internal market as acknowledges under the EU State aid rules will likely be considered in the assessment. In public procurement procedures, the Commission will also consider the availability of alternative sources of supply for the goods and services concerned.
  
• For subsidies falling under Article 5 FSR, it is less likely that their negative effects will be outweighed by positive effects.
  
• It is good to note that application of the balancing test cannot, under any circumstances, lead to a less favourable outcome for undertakings under investigation than if the balancing test had not been applied.

Finally, the Commission indicated that it shall publish guidelines on the application of the FSR by 12 January 2026.

More insights on FSR?

The Commission has published its first Competition FSR brief on 1 February 2024, which relates to the first 100 days after the notification obligations entered into force. This FSR brief provides good insights into the Commission's monitoring activities. Moreover, Member States provide further guidance, such as the Dutch Guidance Note of the Ministry of Economic Affairs titled Application Instrument for International Public Procurement and Foreign Subsidies Regulation (in Dutch). The purpose of this Guidance Note is to provide a practical overview of the FSR obligations for both contracting authorities and companies and can be a useful tool in practice.

We also point out the following Bird & Bird Tech Tools regarding FSR:

• FSR Self-Assessment Tool
  
• EU Foreign Subsidies Regulations (FSR) Guide
  
• FSR Flow Chart

Conclusion

It can be concluded that verification under the FSR has become indispensable whenever foreign subsidies or foreign financial contributions are or may be involved. This regulation has therefore become a must on the checklist in these situations as well as an instrument for companies to signal (suspected) distorting foreign subsidies to the Commission. 

It is open to question whether the withdrawal of tenderers as a result of in-depth FSR investigations by the Commission can be considered a true success story for the contracting authorities (as it may lead to a more limited number of tenders and thus less diversity/competition), for consumers (as it may lead to higher prices) and even for other tenderers / interested parties (if it leads to the withdrawal of the tender or retendering due to a lack of participants). In any event, it appears that the Commission considers this to be a successful outcome and creating a level playing field for all companies operating in the internal market should be encouraged.