PurpLE team members Associate Professor Marta Andhov (PI) and senior researcher Michał Kania published a paper in the Journal of Public Procurement titled “Restricting freedom of contract”, addressing the EU foreign subsidies regulation and its consequences for public procurement.

The context of the paper

Freedom of contract is one of the fundamental principles in contract law. This freedom, however, is not absolute. It is often subject to limitations imposed by various laws. The EU foreign subsidies regulation (FSR)¹ is one example of public procurement law limiting the freedom of choice of the counterparty in the procurement process. The Regulation’s effect on public procurement within the EU has already been briefly touched upon in our previous blog post. The issue at hand is that foreign subsidies create apparent disparities between bidders in the procurement process, providing an advantage to the subsidised companies, which proves particularly detrimental to small and medium enterprises (SMEs). The primary objective of the FSR is thus to protect EU companies from unfair competition resulting from such foreign subsidies.

The purpose of the paper was to analyse this regulation, its efficiency, as well as its geopolitical and economic backgrounds. The article highlighted how the adoption of the FSR is deeply contextual, i.e., how it primarily relates to the situation in which EU companies find themselves concerning policies on climate change, the Fourth Industrial Revolution, Chinese expansion under the Belt and Road Initiative, and unstable transatlantic relations. These key points were examined in the paper to determine whether the regulation is a protectionist measure and whether it will withstand the test of time. The authors concluded that:

“The FSR should be understood and defended as a contextual response to protectionist actions occurring in different jurisdictions and regions. Such trends emphasise the importance of safeguard EU businesses and the internal market from ongoing global economic and political challenges. As a result, the stipulations in the FSR are poised to remain relevant. It appears unlikely that a positive shift in international trade relations will materialise in the near future.”²

Analysing the Regulation

The scope and adoption of the FSR

The adoption of the Regulation commenced with the Commission’s adoption of the White Paper on equal opportunities pertaining to foreign subsidies on June 17, 2020. A public consultation that followed revealed strong European support for such intervention³ and the regulation was adopted in December 2022. The FSR equipped the Commission with three mechanisms to address foreign subsidies. The first tool allows the Commission to look at deals, such as mergers or acquisitions before they happen to ensure that foreign subsidies don’t unfairly influence these transactions. The second tool allows the Commission to examine bids for public contracts and finally, the third tool allows the Commission to investigate any other situations in the market where foreign subsidies might be causing distortions.

The effectiveness of the FSR

The researchers used two perspectives to assess the regulation’s effectiveness: internal effectiveness, which centers around the FSR’s primary objective of safeguarding fair competition in the EU public procurement market, and systemic effectiveness, which relates to the interactions between the FSR and the goals of public procurement law.

Internal effectiveness

To determine the internal effectiveness, the authors assessed three key elements: 1) the subject of the Commission’s control, 2) the effectiveness of the investigations conducted, and 3) the administrative burdens imposed by the FSR.

The Commission’s regulatory purview encompasses activities related to the concept of financial contributions, which can have a variety of forms but fall into the category of either state fund transfers or forgone state revenue. The FSR extensively identifies entities that can make financial contributions as well as several factors that may point toward distortion of competition in the internal market. Such stipulations are necessary for determining whether a distortion takes place and whether a submitted tender is unduly advantageous. Another factor, essential in achieving the objectives of the FSR is the power to enforce corrective measures on foreign subsidised companies. The FSR describes many such measures, including behavioural and structural remedies, or foreign subsidy repayment. The Commission can impose these measures on a company in order to offset any distortion caused by a foreign subsidy in the internal market. In order to evaluate foreign subsidies, the FSR also presents new obligations for companies from third countries, which obliges companies to collect considerable data and request this from their main suppliers and subcontractors. The authors claim that these obligations might deter interest in participating in the EU public procurement market and render the EU public procurement market more bureaucratic and less appealing to third-country companies, possibly leading to reduced competition. Therefore, contractual freedom regarding partner choice seems to be increasingly restricted under EU public procurement rules. As the authors explained:

“This shift assumes that not all competition is suitable or essential for the EU public procurement market, which must be based on fair competition among operators willing to uphold high-quality standards and comply with the EU’s fundamental values.”⁴

Systemic effectiveness

To assess the FSR’s systemic effectiveness, the authors considered the following aspects: 1) its impact on the speed of public procurement proceedings, 2) the certainty of its result, and 3) its influence on achieving the strategic goals of public procurement⁵.

The authors pinpointed that FSR proceedings can last up to eight months according to articles 30(2) and 30(5) – negatively impacting public procurement outcomes and hampering investments by public buyers in Member States. This is primarily due to a standstill period that prevents the effective award of a public contract until the FSR procedure ends. Furthermore, lengthy procedures could cause significant complications when urgent contract awards are needed.

Another issue could arise in cases, in which the two aims of public procurement: 1) protecting fair competition and 2) achieving strategic objectives of the public buyer, come into conflict. This could, for example, occur when an offer is unduly advantaged by a foreign subsidy, but it optimally aligns with the procurement’s strategic objectives. In such cases, a “balancing test” occurs, as described in Article 6 of the FSR. Upon closer inspection of this solution, the authors concluded:

“The solution adopted in Article 6 of the FSR should be generally assessed positively as it balances the interests of protecting competition against the pursuit of the public interest.”⁶

Relating the FSR and the IPI

The International Procurement Instrument (IPI)⁷ is a regulation enacted shortly before the FSR with a similar aim of fostering fair competition conditions for EU companies, with some notable differences.

Firstly, FSR’s focus is within the EU market, while IPI focuses on European companies in the international market, where it strives to open up the public procurement markets of the EU’s major trading partners. Secondly, while FSR targets specific companies receiving state aid, the IPI focuses on state actions. One of the key roles of the IPI is empowering the Commission to limit third-country companies’ access to the EU public procurement market if those companies’ governments do not provide reciprocal access to EU companies.

Conclusion

The authors concluded that the reason for implementing another restriction on freedom of contract in the component related to the choice of counterparty stems from the necessity to safeguard fair competition in the EU public procurement market from entities subsidised by third countries. In this regard, the FSR should pave the way for a more equitable competitive landscape within the EU public procurement market. However, FSR could also result in the prolongation of the procurement procedures and the creation of uncertainties regarding their outcomes.

The full article is available in the Journal of Public Procurement. To see the full article, click the button below.

This research was supported by

References

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. Kania, M. and Andhov, M. (2024), “Restricting freedom of contract – the EU foreign subsidies regulation and its consequences for public procurement”, Journal of Public Procurement, Vol. 24 No. 1, pp. 21-41. https://doi.org/10.1108/JOPP-07-2023-0053 ↩︎
3. Kociubinski, J. (2022),  “The proposed regulation on foreign subsidies distorting the internal market, the way forward or dead end?”, European Competition and Regulatory Law Review, Vol. 6 No. 1, pp. 56-68. ↩︎
4. Kania and Andhov (n 2) ↩︎
5. Andhov, M. (2023), “Regulating for a sustainable and resilient single market: challenges and reforms in the area of public procurement”, European Trade Union Institute, available at: www.etui.org/ publications/regulating-sustainable-and-resilient-single-market ↩︎
6. Kania and Andhov (n 2) ↩︎
7. Regulation (EU) 2022/1031 of the European Parliament and of the Council of 23 June 2022 on the access of third-country economic operators, goods and services to the Union’s public procurement and concession markets and procedures supporting negotiations on access of Union economic operators, goods and services to the public procurement and concession markets of third countries ↩︎