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Foreign subsidy rules would hand broad discretionary powers to EU Commission
06 May 2021 00:00 by Natalie McNelis, Nicholas Hirst
The EU’s new plan to scrutinize foreign subsidies has higher review thresholds than initially planned, meaning fewer deals will be swept up automatically, but it would be a mistake to interpret this as the European Commission loosening the strings.
The policy proposal unveiled yesterday allows the commission to veto M&A deals, block companies from winning public contracts or force asset sales if it identifies subsidies from countries outside the EU that risk harming fair competition in the bloc.
The automatic review thresholds are higher than in an earlier draft from June 2020, but the commission would retain extensive powers to call in deals at its own discretion. Moreover, enforcement power is entirely centralized around the commission in the final proposal, removing the role for national enforcers envisaged last year.
That adds up to a remarkably wide mandate to intervene — or not to.
— What’s new —
The proposal rests on three pillars: Mechanisms to call in M&A deals and public-procurement bids where foreign subsidies are in play, and a discretionary power to investigate concerns on the market.
The architecture remains broadly the same as in the draft floated last year, but some of the details have changed.
First, the commission will be the sole enforcer, whereas the June paper had floated the idea that certain transactions, at least, might be scrutinized at national level. This change will ensure coherence and continuity, and will probably reduce the likelihood of reviews becoming ensnared by politics, whether favoring investment or protecting local companies.
Second, the criteria that trigger an automatic notification to Brussels have been tightened, though the commission will still have the power to call in deals below them. That will reduce the number of cases being examined and will ensure that the flow of smaller investments and tender bids continues to flow — for good or for bad.
Only acquisitions where the target has a turnover of more than 500 million euros ($600 million) would now be caught, up from a possible 100 million euros.
For public-procurement contracts, only those worth more than 250 million euros would be examined, ensuring only major tenders such as large motorway sections would come in scope.
In addition, investigators will not examine subsidies that amount to less than 5 million euros over three years, up from a paltry 200,000 euros in June.
Supporters of the proposal, including many parts of European industry, will be happy to see that the commission ultimately opted for covering companies once they have an “economic activity” in the EU. Back in June, the commission seemed to favor only targeting companies “established” in the EU, a higher barrier.
Now merely selling into the EU would be enough to allow regulators to rifle through a business suspected of having an illegal advantage through a generous foreign backer.
Conceivably that could catch e-commerce sites selling into Europe, airlines flying into the bloc, ships delivering cargo to EU ports, as well as construction companies with projects in the EU.
— Shuffling the pillars —
The weighting given to each of the three pillars also seems to have changed, with the power to investigate market issues on the basis of spontaneous concerns being relegated to a fallback option in the commission’s thinking.
Reading between the lines, the commission now wants to focus its attention on the most distortive subsidies, which are also easiest to spot: subsidized acquisitions and procurement bids.
For those big-ticket deals and tender submissions, companies will need to notify the commission and wait for approval. That gives the regulator plenty of leverage.
The impression that the third pillar is now more of a fallback was fueled by Margrethe Vestager, the EU’s competition boss who headed up work on the proposal.
Yesterday she described it as a “really good backing” in cases where “someone failed to notify that they are doing an acquisition with a subsidy, that they're doing a bid in a tender with a subsidy.”
That may disappoint the large contingents of European industry that were hoping for robust enforcement of that malleable third pillar, which could address all sorts of existing situations that wouldn’t be caught by the M&A review powers, public procurement or anti-dumping rules.
Imagine, say, a Chinese train manufacturer with a factory in Europe pumping out locomotives on the back of large state loans from abroad. Or airlines flying into Europe from large, luxurious airports built and run for them by their state sponsors.
Nevertheless, once the commission has the power to investigate at will, it may find a sudden desire to do so, regardless of the wording of the policy. The discretionary tool, sweeping in scope, is like a wildcard that the commission may or may not decide to use.
And it’s not the only one. Automatic reviews are based on thresholds, but the proposal would also give the commission the power to call in deals or tender bids below the thresholds when they think they warrant scrutiny before being implemented.
So while, with the one hand, the commission has raised the thresholds to ensure fewer situations are automatically caught, with the other it is seeking powers to review almost anything.
Depending on your perspective, the flexibility built in to the commission’s proposal will either strike fear or inspire hope.
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