Market Distortions due to Third-Country Subsidies

Ensuring effective and sufficient sanctions: Furthermore, ensuring effective and sufficient sanctions is of great importance. The previously proposed limitation of sanctions to a price surcharge of up to 20 percent is considerably too narrow. Even sanctions with a fixed cap of a price surcharge at a maximum of 40 percent may not be sufficient. In this respect, it might be advisable to provide flexibility for the upper cap of the sanctions so that, for example, a price surcharge of 50 percent should also be possible under certain circumstances. For particularly serious cases, the possibility of completely excluding a bid should also be provided for. In particular, this should be given greater consideration if the bidder in question is demonstrably a state-owned enterprise from a third country identified as closed or unfair. One argument in favor of a complete exclusion in these cases is that the increasing occurrence of such companies on EU markets, often with suspiciously low prices, has recently proven to be particularly problematic in many cases.

Market Distortions due to Third-Country Subsidies

In June of 2020, the European Commission presented proposals for new control instruments (“modules”) to address third-country subsidies that distort competition in the internal market in its White Paper on levelling the playing field as regards foreign subsidies (COM(2020) 253 final).6 German industry welcomes the objective set out in the White Paper, but notes that there is a need for adjustments to the shaping of the modules. It is especially important that they are coherent with existing EU law.

Status quo

An increasing number of third-country companies are also operating in the EU's internal market. Thirdcountry subsidies that favor these actors can therefore also have an effect in the internal market and may distort competition there. Such third-country aid can, for example, result in extraordinarily low bids in the context of public procurement in the EU. This means that bidders subsidized by third countries can undercut other bidders by submitting particularly low bids and thus win contracts. Such extremely low bids would not be economically sustainable without the third-country subsidies, so that competition for the contract is distorted to the detriment of other bidders who do not receive third-country subsidies. However, third-country subsidies can also distort competition when acquiring shares, voting rights or otherwise "material influence" in EU companies. Competition between potential buyers of EU companies can be distorted by the fact that only a third-country subsidy (strengthening of financial power) makes it possible to submit an acquisition offer that is favored over offers from other potential buyers; at the same time, this also impairs investment opportunities in EU companies.

While EU state aid law provides effective control for Member State subsidies, there is a lack of comparable control and monitoring for third-country subsidies. To protect competition in the internal market from distortions caused by third-country aid and to ensure a level playing field in the EU, effective control mechanisms for third-country subsidies are needed as well. The European Commission's White

6 On May 5, 2021 the European Commission published a subsequent legislative proposal to the White Paper: https://ec.europa.eu/competition/international/overview/proposal_for_regulation.pdf. From German industry's point of view, it is very positive that the European Commission is now presenting a legislative proposal to curb market distortions caused by massively subsidized companies from third countries. Particularly in the case of takeovers and public procurement, companies need fair opportunities and a level playing field. The right balance must be struck between effective third-country subsidy control and maintaining the EU's openness to investment (this initial assessment will be followed by a detailed evaluation by the BDI). In the following, the analysis in this position paper refers only to the preceding White Paper.

Paper is the first step towards introducing control for third country subsidies. The White Paper proposes three modules as well as possible regulations with regard to EU management of financial resources.

The first module is intended to check for possible distortions of competition in the internal market caused by subsidies from third countries. This involves reviewing the conduct of companies in the internal market that are subsidized by third countries. In this respect, there is a certain comparability with abuse control under EU competition law. The latter enables the European Commission to sanction the abuse of a dominant position by companies in the internal market.

With the second module, the White Paper proposes a preventive control of the acquisition of shares, voting rights or otherwise of "material influence" in EU companies by companies receiving third-country aid. A similar preventive control already exists to protect future competition in the market affected by such acquisitions through EU merger control. However, EU merger control only serves to examine the effects of the intended merger on competition. By means of the second module, on the other hand, it would be possible to examine whether competition-distorting effects of third-country subsidies exist that favor an acquirer.

For controls under the first and second modules, the European Commission also proposes that competition-distorting third-country subsidies may be tolerated if they serve EU policy objectives, such as achieving climate neutrality, protecting the environment, or creating jobs.

The third module of the White Paper proposes a specific preventive control of third-country subsidies that favor bidders in the context of public procurement. So far, the provisions of the EU public procurement law allow, at best, only a very limited control of bids subsidized by third countries; the EU Directives on public procurement contain provisions on "abnormally low bids", which, however, give the contracting authority wide discretion in the assessment and are therefore often not very effective as a result.

Following on from the proposals in the White Paper, at the beginning of October 2020 the European Commission had launched an Inception Impact Assessment on various possible options for action - to protect competition in the internal market from distorting third-country subsidies. These options for action concern the implementation (legislative, administrative, etc.) of new control mechanisms for third country subsidies.

Recommendations

Ensuring a level playing field in the internal market requires effective protection of the internal market against distortions of competition caused by both, state aid to Member States and third-country subsidies. It is time to complement the competition protection provided by EU state aid law with a corresponding protection mechanism for distortions caused by third-country subsidies. Market-distorting third-country subsidies should not be tolerated on the basis of general EU policy objectives. They should not be justifiable by means of an EU interest test; as such, a level playing field in the EU would not be created. Rather, an EU interest test would open the door to the politicization of legal decisions.

New instruments must address the distortions of competition caused by third-country subsidies that have already been identified and, at the same time, address future distortions of competition. To this end, ex-post and preventive controls are necessary, also to adequately address vulnerabilities of certain procurement markets to distortions caused by third-country subsidies.

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The introduction of corresponding control mechanisms must be coherent in order to minimize additional bureaucratic burdens for companies and avoid contradictory decisions due to different controls. This applies both to the relationship of new controls to each other and to existing EU competition law, EU rules on public procurement (including the upcoming revision of the draft International Procurement Instrument (IPI) and the regulation on the screening of foreign direct investment (FDI screening regulation). Nor must the EU's fundamental openness to investment be undermined. In the interests of coherent decision-making practice, the European Commission should be exclusively responsible for all the modules proposed in the White Paper. This would make sense given its expertise and experience in EU state aid control when it comes to investigating aid to Member States. However, the Member States and their expertise on more regional markets should be included in the decision-making process of the European Commission.

The procedures must be designed to be as unbureaucratic as possible, also in order not to counteract the economic advantages of lawful conduct. This includes legally clear assessment criteria that enable predictability of decisions. In the case of parallel investigations of the same conduct under different control regimes, the procedures should be linked wherever possible in order to reach a uniform decision on the permissibility of the conduct; this applies in particular to controls under the second module and controls under the EU merger control and FDI screening regulation.

As a matter of principle, the modules should be linked to appropriate thresholds so that they are limited to those situations that pose a risk of significant distortion of competition. The proposed general de minimis threshold of 200,000 euros for relevant third-country subsidies appears to be set too low for this purpose. Particularly with regard to the proposed preventive controls, it gives rise to fears that a flood of cases to be reviewed will divert the European Commission's personnel and technical resources away from cases with a significant risk of market distortion.

In order to counter transparency deficits with regard to the financing of state-owned enterprises (SOEs), it should be presumed that these enterprises receive third-state subsidies if a third state holds a stake in them above a certain threshold, for example 20 percent. The (German) Monopolies Commission also advocates such a presumption in its XXIII Biennial Report.

Module 1 - General ex-post review

The factually unrestricted ex-post review of the first module may not result in undermining decisions or thresholds of the preventive controls proposed in the other modules. Accordingly, circumstances subject to the preventive controls proposed in the White Paper must not be subject to a renewed ex post review by means of the first module when addressing the same concerns. Otherwise, legal certainty of and legitimate confidence in valid decisions would be undermined.

In the context of the ex-post review of the first module, privileges (measures that amount to special or exclusive rights) of the subsidized company in third country markets, including domestic markets, should also be taken into account if they create an artificial competitive advantage in the internal market. Furthermore, the measures taken by the European Commission to offset the subsidization (remedies) must be proportionate in design and application. In principle, a third-country subsidy should be repaid with interest, as in EU state aid law. However, a corresponding compensation payment by the subsidized company to the EU budget could also be considered. Divestments and other measures affecting the corporate structure must be clearly defined as measures of last resort. The first module should also contain options for issuing guidance and recommendations.

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Module 2 – Preventive control for acquisitions of shares, voting rights or otherwise of "material influence" in EU companies

Preventive control of the acquisition of shares, voting rights or otherwise of " material influence" in EU companies by companies receiving third-country subsidies should be designed in conformity with existing (preventive) controls under EU merger control and those under the FDI screening regulation. The time limits should correspond to those of EU merger control. Moreover, in the case of parallel reviews under these preventive controls, the procedures should also be linked from the very beginning with the notification initiating the procedure. This would reduce burdens on the companies involved and risks of contradictory decisions. Remedies under the second module should be sought primarily through commitment offers by potential purchasers; prohibition decisions should be considered only as a measure of last resort.

Module 3 – Preventive control for bids in public procurement

In principle, German industry welcomes the fact that the proposed instrument is also intended to combat unjustified subsidization on the part of third countries in connection with bids for public procurement contracts. However, with regard to the third module, a significant revision of the proposal in the White Paper appears to be necessary. While the proposal so far would cause a very high and partly unjustifiable bureaucratic effort with regard to individual contracts, the general orientation of the instrument should be less focused on individual procurement procedures and more on a systemic assessment at sector level.

The notification requirement proposed in the White Paper appears to be disproportionate and in part too far-reaching, especially considering the sanctions for non-compliance (fines of up to 10 % of group revenues). According to the White Paper, bidders or companies, respectively, should notify not only third party subsidies to themselves, but also third party subsidies to all members of their consortium, all their subcontractors and all their suppliers (hereinafter: third parties) when submitting a bid. First, companies do not have the same informational and investigative powers with respect to third parties as do government agencies, so they must rely on the completeness and accuracy of the information received from the third parties. Therefore, sanctioning bidders in case of incorrect or incomplete information provided by these third parties would be inappropriate. Second, the scope of notification for all third-party benefits for all types of public procurement seems disproportionate given the burden it places on companies. The third module of the White Paper should therefore differentiate the scope of the notification obligation of bidders between public procurements receiving EU funds and those not receiving EU funds.

For public procurements not receiving EU funding, it should be considered to limit the notification requirement for third party subsidies to members of a consortium to the members of the consortium and major subcontractors and suppliers such as direct subcontractors and suppliers.

In contrast, there is a greater potential for distortion of competition in public procurement receiving EU funding. Not only would competition between bidders in the award of contracts be affected here, but also competition for the reception of limited EU funding for projects (in the context of contract implementation). Therefore, a more comprehensive notification requirement would be appropriate for thirdcountry subsidies.

The responsibility for the third module should not lie with the national authorities of the Member States, as this could lead to inconsistent decision-making practices. In addition, the pressure to reduce costs triggered by the budgetary policies of the Member States could have a negative impact on the

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