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22.12.2020 | KPMG Law Insights

EU Commission White Paper on Subsidies from Third Countries: Implications for Public Procurement

EU Commission White Paper on Subsidies from Third Countries: Implications for Public Procurement

Background: Combating subsidies from third countries that distort competition

On June 17, 2020, the European Commission adopted its White Paper entitled “Ensuring Fair Competition Conditions for Subsidies from Third Countries.” The White Paper contains a large number of trend-setting statements that already provide an outlook on how Member States will have to deal with subsidies from third countries (i.e. non-EU countries) in the future.

The White Paper contains three so-called sub-instruments that target different issues. Sub-instrument 1 deals with the overall coverage of such subsidies and the question of the extent to which they distort competition in the internal market. Sub-instrument 2 sheds light on third-country subsidization in connection with the acquisition of EU target companies. This article deals with sub-instrument 3, in which the Commission describes the approaches it sees for eliminating third-party subsidies in public procurement procedures.

The contents of the White Paper are not binding. With a White Paper, the Commission usually publishes proposals for Community action in a specific area. In the past, however, these white papers often provided important impetus for new legal developments. Their importance should therefore not be underestimated.

 

Status quo: Regulatory gap with regard to subsidies from third countries

The reason for the adoption of the White Paper is the fact that, as things stand at present, there is a regulatory gap with regard to subsidies from third countries.

The state aid provisions of Art. 107 et seq. TFEU already apply in principle only to aid granted by Member States, but not to aid granted to third countries. The procurement regulations also do not contain any provisions that would allow contracting authorities to sanction subsidies from third countries in the context of a procurement procedure. The price check in the case of unusually low bids regulated, for example, in German law (cf. e.g. Section 60 of the Public Procurement Ordinance) also relates only to aid from the Member States.

Combating subsidies from third countries in public procurement: the Commission’s proposals

In its White Paper, the Commission is now for the first time developing proposals to combat this state of affairs and, according to its own statement, would like to enter into a broad-based discussion with stakeholders.

Accordingly, the following subsidy verification procedure is proposed in the context of public procurement procedures:

  • Notification of receipt of third country subsidies by the companies to the contracting authority as part of the bidding process.
  • In this context, introduction of thresholds so that not every trivial subsidy received by a company that may be only slightly distortive of competition has to be taken into account
  • Conduct a 2-stage audit consisting of a preliminary audit and an in-depth audit:
    • At the pre-screening level, it is envisaged that a national supervisory authority will obtain and assess information on the existence of a third-country subsidy. If it concludes that the subsidy is not from a third country, this would be communicated to the contracting authority. The latter could then continue the award procedure.
    • If, on the other hand, there were a subsidy from a third country, an in-depth investigation would be initiated, in which the EU Commission would also have to be involved. It is not possible to award a contract until then.
  • Sanction mechanisms in the event of failure to report or incorrect reporting by companies in the form of fines, exclusion from ongoing award procedures or termination of ongoing contracts

 

Future requirements for public-sector clients

While the Commission’s proposals already give an impression of where the journey is headed, they also raise a large number of questions that need to be clarified in the further course of the debate.

The requirement for reporting by companies initially sounds like a familiar procedure and will probably be queried in practice by means of forms. In addition to the already known forms on the grounds for exclusion pursuant to Sections 123, 124 GWB, declarations of compliance with collective bargaining agreements, Scientology protection clauses and similar declarations, the scope of the documents to be submitted and thus the workload for the companies and contracting authorities will therefore increase even further.

It is still completely unclear who is to take over the task of the national supervisory authority. The answer to this question naturally lies within the competence of the member states to regulate issues of state organization independently.

In this context, the involvement of national or, if necessary, even European supervisory authorities naturally raises immediate questions about the time dimension of such involvement. Even at the present time, contracting authorities are under considerable time pressure in public procurement procedures for various reasons. In this regard, the Commission states that delays are to be prevented as far as possible by the subsidy review. To this end, deadlines of 15 days for the preliminary examination and no more than three months for the detailed examination are proposed. However, these proposals already make it clear that such test procedures are time-consuming and require careful and realistic planning in advance. For this purpose, it is particularly necessary to know the potential group of bidders. Public contracting authorities are therefore recommended to make use of instruments such as market investigation procedures, especially in subsidy-relevant procurement fields. Otherwise, there is a risk of delays in the award process.

With regard to the proposed sanction mechanisms, questions are also likely to arise for many contracting authorities. While the exclusion of companies from award procedures or the termination of contracts is part of the daily business of contracting authorities, the imposition and collection of fines is probably new territory.

In addition, a number of legal issues will inevitably arise. In addition to the concept of subsidy in general, problems of proof are also to be expected in the context of the award procedure.

In addition, the question already arises as to how to proceed under procurement law in the case of a third-party subsidy. Should there be a mandatory exclusion of the company in question? Or is a calculation of the subsidy equivalent and corresponding fictitious increase in the bid price to be made as part of the bid evaluation? All of these questions will need to be illuminated as the debate continues.

 

Conclusion: The White Paper as a harbinger of future regulations

With the White Paper, the Commission has provided the prelude to an important discussion. Experience has shown that third-party subsidies play a weighty role in many procurement areas. Companies from third countries are increasingly entering the market with financial support from third countries , for example, in the procurement of trains and streetcars, in shipbuilding and in the defense sector, as well as in plant construction. Potential use cases do not only concern the obvious issues with companies from the People’s Republic of China. With Brexit, the UK will also become a third country in relation to the EU. The consequence of this is that (subject to a separate agreement on special access to the single market) UK support measures will also have to be measured against such regulations in the future.

Consultations on the White Paper have already been completed. On the basis of the results of the consultations, the Commission will decide on the most effective way to achieve the objective of protecting the EU internal market from subsidies from third countries in procurement procedures. It can be assumed that many of the considerations from the White Paper will also play a role in future legislative implementation.

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