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ARTICLE2 July 2021

Swedish Enterprise: European Commission’s estimates on administrative burden in the proposal on Foreign Subsidies are flawed

The European Commission’s proposal on foreign subsidies is a welcomed initiative that could contribute to a more level playing field in the EU Single Market. However, some sections of the proposal are problematic, since conclusions drawn in the impact assessment conducted for the drafting of the proposals appear to be flawed.

Stefan SagebroPhoto: Ernst Henry Photography AB

More specifically, this relates to the estimates on how many companies will be affected by the suggested mandatory notification requirement in cases of mergers, acquisitions, and bids in public procurement proceedings above certain thresholds. The real administrative burden and necessary staff resources will be many times higher than the projections used to draft the proposals.

Let’s take public procurement as the primary example. The Commission has suggested that undertakings entering public procurement procedures with a value greater than EUR 250 million are required to provide details of all financial contributions received in the previous three years. This would potentially place considerable administrative burden on companies. This is due to the key concept of “financial contribution”, which in practice implies that all economic interaction with a third country public entity, be it part of the administration or in company form, needs to be gathered and ultimately sent to the Commission for review.

It is important to establish as accurately as possible how many companies that will be affected by this. It will place an administrative burden on companies and additional workload on the Commission. The relevant factor is the average annual number of bids in procurement proceedings with a value above a given threshold. This will correspond to the number of companies that will have to perform the “due diligence exercise” and send in a notification, and how many cases the Commission needs to handle.

It is here that a misstep seems to appear. The Commission estimates, in its impact assessment, the number of cases at an average of 36 a year at a threshold value of EUR 250 million, based on statistics on published contract award notices. Contract award notices are, however, not a good proxy for the number of bids, as they include several contracts and several economic actors. This is also mentioned later in the same text - that in all contracts covered by these award notices with a value of over EUR 250 million between 2015 and 2017, the number of 'awardees', i.e., companies that were awarded one or more contracts, amounted to 435. This gives an average annual number of companies during these years that have received one or more contracts of 145.

But this estimate is probably also too low, as it only counts the number of winning bids. Many more bids are submitted that do not get approved. The Commission states in the impact assessment that in the European TED database the average is 4.36 bids per procurement. Commission officials have stated orally at a question-and-answer session on the proposals arranged by BusinessEurope, that the number of tenders in procurements exceeding EUR 250 million is, in fact, around six on average. This would imply that the number of companies that would be subject to the requirement of prior notification is between 157 and 216. If the previous estimate is also considered, the range is instead 145–216 companies. In addition, as main subcontractors and suppliers would also be subject to the new requirements, the total number of annual notifications would likely be in the range of 200-300. This is an estimate, but one that is based on reasonable assumptions.

One objection could be that this includes all companies – not only those that are foreignowned, (which would only account for 4.8 per cent of bids). However, it is arguably reasonable to assume that most companies able to compete in a procurement valued in excess of EUR 250 million are large companies with considerable activity outside the internal market. Such companies are likely to be global businesses with considerable presence on other continents, making them as exposed to these proposals as foreign-owned companies.

The Commission has estimated that the full-time equivalents (FTE) of assessing notifications would amount to 45, while the ex officio task would be staffed by 20 FTE. This is based on a case number of 36. If the number of cases was in the 200-300 range as suggested above, the Commission would need to scale up its resources for these activities accordingly.

When it comes to mergers and acquisitions, the calculation also ends up as an underestimate, although not to the same extent as in procurement. The number of annual cases will probably be in the range of 50-150 instead of 30 as indicated in the impact assessment.

In conclusion, the number of companies that would be affected by this considerable increase in administrative burden will be several times higher than estimated. The same applies for the staff requirement at the Commission, which already seem to be challenged in terms of resources and workload, judging by a recent article in Politico. One could ask how effective it is to routinely review the financial statements of companies that to some extent have financial interaction with third countries, without any specific indications that they have received foreign subsidies. Perhaps it would be better if the majority, if not all, of the resources that would need to be directed to the ex officio scrutiny, where actual indications of foreign subsidies is available. It would therefore likely be for the best if the mandatory notification requirements were removed from the proposals, and for the Commission to focus its efforts in a more targeted way.

Contact: Stefan Sagebro, stefan.sagebro@svensktnaringsliv.se, +46 8 55343101

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Written byStefan Sagebro
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