The Commission has now just announced in February 2024 that it has launched its first in-depth investigation into a foreign subsidy, relating to a public procurement undertaken in Bulgaria in which CRRC Qingdao Sifang Locomotive Co., Ltd, a Chinese state-owned subsidiary, is participating. The Commission's investigation has the power to disqualify the company from the procurement, if (in effect) it should find that the company is drawing unfair advantage in the procurement through State subsidy abroad as would damage fair competition in the EU. As previously noted this is a major new departure in international subsidies regulation, which creates the power to exclude particular bidders from major procurements based on receipt of subsidies abroad. The Commission investigation follows the mandatory notification within the procurement procedure that the FSR requires. It expects to complete its investigation by 2 July 2024. In this article, we look into the FSR and consider the implications of this investigation for recipients of subsidies outside the EU which plan on trading in the EU's Single Market.
What is the Foreign Subsidies Regulation (FSR)?
As set out in our previous article, the FSR is a new competition law instrument that gives the European Commission powers to investigate and take action against businesses which have benefitted from financial assistance outside the EU and which thus might allow such businesses to trade at an unfair advantage within the EU Single Market, thus causing harm to other businesses operating in the EU.
The objective of this new law is to ensure a level playing field between all businesses trading within the EU. The law recognises that some businesses trading in within the EU that are also operating elsewhere in the world and benefiting from subsidies in other countries (as are outside the remit of EU State aid rules) may employ subsidies elsewhere to cross-subsidise activities in the EU and thereby harm competition. The possibility of such harm to competition is considered particularly acute from companies based in partial or non market economy countries.
The FSR states that a subsidy foreign subsidy shall arise "where a third country provides, directly or indirectly, a financial contribution which confers a benefit on an undertaking engaging in an economic activity in the internal market and which is limited, in law or in fact, to one or more undertakings or industries". Therefore the test for a foreign subsidy has parallels with the State aid test at Article 107(1) of the Treaty of the Functioning of the European Union, but applies to awards of financial assistance made outside the EU (as now includes the UK).
The European Commission hasve the following investigative powers under the FSR:
- a power to investigate notifiable mergers and acquisitions where the relevant parties have received financial contributions from non-EU countries;
- a power to examine bids in public procurements where the estimated contract value is at least €250 million and the bidder has received financial contributions of at least €4 million from non-EU countries in the last 3 years;
- a general market investigation tool, which allows the European Commission to investigate situations they have a concern that a foreign subsidy could affect the operation of companies established or active within the EU Single Market.
The FSR imposes notification obligations where particular “concentrations” of foreign subsidies are present in transactions. For mergers and acquisitions, a notification to the Commission is mandatory where the acquirer has benefited from a financial contribution from non-EU public sources of at least €50 million and the turnover of the company being acquired exceeds €500m).
Similarly an obligation arises in public procurements taking place within EU Member States where there has been a foreign subsidy to a bidder or its group of at least €4 million in the last three years prior and the estimated value of the procurement is €250 million or greater. Procuring authorities must seek and bidders crossing this threshold must provide details of relevant foreign subsidies received, to be passed to the Commission. Failure to provide a relevant declaration can be grounds for exclusion from the tender.
The first EU Foreign Subsidies Investigation
In February 2024, the European Commission announced its first EU Foreign Subsidies investigation which will look into whether a subsidiary of a Chinese state owned locomotive manufacturer gained an undue advantage from foreign subsidies when bidding into a transport contract.
The European Commission was alerted to the potential issue by Bulgaria's Ministry of Transport and Communications which received a declaration from the bidder and referred this to the European Commission for consideration, as the new procedures require.
The procurement relates to the provision of "push-pull" trains and related maintenance and staff training services. The estimated contract value is BGN 1.2 billion (€610 million).
In line with the FSR it is understood that CRRC Qingdao Sifang Locomotive Co Ltd, which is a subsidiary of CRRC Corporation, a Chinese state-owned train manufacturer, declared that it had received foreign subsidies. This gave rise to an expedited review, after which the Commission has launched an in-depth investigation noting that there are "sufficient indications that this company has been granted a foreign subsidy that distorts the internal market".
From the date of notification, the European Commission has 110 working days to review and assess the alleged foreign subsidies to determine if the financial assistance may have allowed CRRC Qingdao Sifang Locomotive to submit an unduly advantageous bid in response to the tender.
Following the investigation, the European Commission could decide to:
- allow CRRC Qingdao Sifang Locomotive to continue subject to commitments that would fully and effectively remedy the distortion;
- prohibit the award of the contract to CRRC Qingdao Sifang Locomotive; or
- issue a no-objection decision.
The final decision will be published by the Commission in the Official Journal of the European Union.
Conclusion
This first EU Foreign Subsidies Regulation investigation is a reminder that all businesses with a European presence receiving subisides from non-EU countries need to be mindful of the requirements of this new area of competition law.
The outcome of this investigation will be watched very carefully, particularly with a view to understanding how and when the Commission determines a significant enough distortion of competition to warrant positive action, whether by behavioural commitments or exclusion. If the Commission takes a particularly tough line on this then this has major implications for the participation in future European procurements of many significant State-owned enterprises from China and other non-EU countries. Were that to happen then the reaction from those countries will be similarly instructive and we will observe what happens when significant competition and trade policy requirements collide.
Despite the negotiation of the EU-UK Trade and Cooperation Agreement and adoption of the Subsidy Control Act 2022, there is no carve out under the Regulation for UK subsidies. Indeed, the Regulation applies equally to subsidies from all non-EU countries, hence companies receiving significant subsidies may in future be caught by the same rules.
Whilst many predicted the first Commission investigations would involve the financing of football clubs (a complaint has been made against Paris St Germain by La Liga) we now know that the first case involvea the transport sector. This is perhaps unsurprising given the scale of contracts let in this area. It would not be surprising if the next investigation was in the same sector or involved a large acquisition. The European Commission has a team dedicated to processing notifications and undertaking investigations, therefore we anticipate this area of law will develop significantly in the coming years.
