Public Procurement and the consequences of the war in Ukraine

Introduction

Russia’s attack on Ukraine has far-reaching consequences on the lives of the Ukrainians as well as those in other parts of the world. In response to Russia’s military attack the Council adopted several sanction packages,[1] the last one of which entered into force on 3 June 2022. With these sanctions the EC wishes to disrupt the Russian economy in an attempt to end the war. Unavoidably, the sanctions will come at a cost for the internal market, no less so for public spending and the way in which EU money can be spent by governmental bodies. The sanctions also address public procurement law, i.e., contracting authorities are prohibited from executing a contract award to tenderers affiliated with Russia, whether directly or indirectly.[2]

Several countries have also adopted measures to add to the sanctions or to combat the indirect effects of the war on public procurement. Most of the measures adopted pertain, for instance, to disrupted global supply chains and, consequently, price volatility.

In this article we will describe the direct consequences of the latest sanctions for public procurement proceedings and contract awarding by governmental bodies as well as highlighting some of the measures adopted by individual Member States and the UK.

Sanctions against Russia – Public Procurement

The sanctions adopted in response to Russia’s military attack on Ukraine in the beginning of 2022[3] add to the existing measures imposed on Russia for its annexation of Crimea and its failure to comply with the Minsk agreements (which aimed to end the aggressions in parts of the Donbas).[4] As it currently stands the sanctions stretch from targeted restrictive measures imposed on Russian individuals to the total ban on import and export of certain goods and services.

Public contracts are addressed in the fifth sanction package which was adopted in April 2022. Since then, Article 5k of Regulation 883/2014[5] explicitly prohibits a contracting authority from awarding or continuing to execute a public or concession contract covered by the public procurement Directives to or with, in essence, Russian individuals, companies, and those closely affiliated with Russia.

The ban covers all natural persons with a Russian nationality, legal persons, entities, and other bodies established in Russia. Also, non-Russians or non-Russian companies fall within the ban, i.e., legal persons, entities or bodies whose proprietary rights are directly or indirectly owned by more than 50% by a Russian person or entity. In other words, contracting authorities are banned form awarding contracts to companies which have a Russian national or company as a majority shareholder or ultimate beneficiary. The ban also applies to contracting with the representatives of persons or companies mentioned above. Finally, but no less importantly, the ban also applies to parties relied on by a tenderer where this party performs or is supposed to perform more than 10% of the contract.

The ban on awarding a public contract or continuing to execute a contract is extended to contracts explicitly excluded from the scope of the public procurement Directives. For instance, contracting authorities may not award contracts and concessions related to real estate transactions, radio and audio-visual production and broadcasting, electronic communication services, and arbitration, conciliation and legal services to those who fall within the scope of Article 5k of Regulation 883/2014.[6]

For contracts and concessions already concluded, Article 5k(4) of Regulation 883/2014 provides a transition period. All contracts concluded prior to 9 April 2022 are exempted from the ban until 10 October 2022, after which date the contract shall be terminated or suspended indefinitely and unconditionally, depending on the national legal regime.[7]

The ban on awarding contracts or concessions to Russian nationals and companies is not absolute as the competent national authority[8] can authorise the award or continued execution for a limited range of contracts, such as contracts on the intergovernmental cooperation in space programmes, the import or transport of natural gas and oil, and the import or transport into the EU of coal. Authorisation is to be followed by informing the other Member States within two weeks thereof.[9]

How to determine if a tenderer or a subcontractor is covered by the ban?

The ban on awarding contracts to Russian nationals and companies is addressed to contracting authorities. Therefore, if a contracting authority fails to comply with the ban, it can be subject to prosecution and penalties.[10] Establishing whether tenderers are banned from participating is thus of great importance for contracting authorities. A contracting authority will have to diligently investigate a tenderer’s background and possibly that of the subcontractors or other parties the tenderer wishes to rely on. Investigating the background may prove difficult as the more intermediaries involved, the likelier it is that contracting authorities will have to consult Russian sources to find out who is the ultimate beneficiary of a tenderer. It may prove especially difficult for contracting authorities with limited resources to properly conduct an investigation into a tenderer’s background. To help contracting authorities, the EC suggests requesting a statement by the tenderer in which it declares that none of the sanctions are applicable.[11] In case of reasonable doubt concerning the information received the contracting authority is however advised to request additional information. The only logical consequence of not receiving the information needed after a request, is the exclusion of the tenderer or termination of the contract.

Aside from the contracting authorities there is an important role for tenderers in ensuring the effective enforcement of the sanctions. Where contracting authorities themselves might face difficulty investigating the tenderer’s background, the role of other tenderers could proof indispensable. Apart from a moral incentive, a competing tenderer has a commercial motive to expose tenderers that meet the conditions for the ban. After all, by exposing that a tenderer is covered by the ban, the exposing tenderer is more likely to win the contract.

Regardless of the motive, we suggest following four steps to determine whether a tenderer or a subcontractor is banned from winning a contract:

(I) Establish whether the tenderer is a Russian national, or whether a legal person (all sorts of entities) is incorporated in Russia or whether it has its corporate seat in Russia;

(II) Establish whether the ownership in a legal person belongs, directly or indirectly (more than 50%), to a person or entity mentioned under (I);

(III) Establish whether the tenderer is represented by natural persons or legal persons that act on behalf of a person or entity as mentioned under (I) or (II);

(IV) Establish if a subcontractor or supplier - who meets criteria (I) or (II) - performs or is supposed to perform more than 10% of the total contract value.[12]

How to establish whether a tenderer is owned by a Russian company or individual?

The sanctions exclude any legal person from participating in a tender if it is owned, directly or indirectly, by more than 50% by a Russian individual or a Russian company. At first glance this criterion seems straight forward. However, if companies are only in part ‘Russian’ it might become a difficult exercise to establish whether the ownership of a company is in fact over 50% Russian. For instance, how to decide if a company is banned from participating in a tender if it is 30% owned by a Russian individual and the other 70% by a company established in the EU, albeit that this EU company is 40% owned by a Russian company? The EC answers this question in its FAQ.[13] According to the EC one must calculate what proportion of the tenderer is directly and indirectly owned by a Russian individual or company, regardless of the level of the ownership. In the given example this means that the tenderer is 30 % owned by a Russian individual in addition to which 40% of the remaining 70% of the ownership belongs to a Russian company, which equates to 28 % of the total ownership. Add 28% to the 30% owned by the Russian individual and the tenderer is 58% directly and indirectly Russian owned and thus banned from participating in a tender.

How to establish whether a subcontractor or supplier participates in a contract for more than 10% and what are the consequences?

In its FAQ the EC gives guidance on how to determine whether a ‘Russian’ subcontractor or supplier performs or is supposed to perform a contract for more than 10 % of its value.[14]

First the EC clarifies what is meant with the terms ‘subcontractor’ and ‘supplier’. The terms are meant to cover all parties in a supply chain so not only the direct subcontractor or supplier of a tenderer but also parties at more distance from the tenderer. Also, it does not matter whether the subcontractor or supplier provides services, works or any other kind of supply. Finally, the EC clarifies that the criterion is fulfilled if a tenderer potentially uses a subcontractor or supplier to meet the tender conditions, even when it does not actually rely on it yet.

The EC also gives guidance on how to deal with a subcontractor or supplier that is banned, i.e., replacement is the preferred route.[15] Only when replacement is not viable, the EC suggests terminating the contract. The EC also stresses that replacing a subcontractor or supplier should always be done in accordance with the principles of non-discrimination and equal treatment.

What to do when an already concluded contract is incompatible with the sanctions?

Contracts which are already in place can in principle be implemented or performed until 10 October 2022. After that date all contracts that are incompatible with the sanctions must be terminated. The EC recommends that contracting authorities award a new contract well before this deadline.

Termination of a contract on the basis of Regulation 883/2014 is deemed due to an unforeseen event. However, that on itself is insufficient to award a new contract following a negotiated procedure without prior publication of a contract notice. Only where this is justifiable can the contracting authority award a contract on the basis of such procedure. In principle the award of a new contract is to be done following a normal procedure or an accelerated procedure.

For more details on the application of the accelerated procedure the EC refers to its guidance published in the wake of the COVID-19 and asylum crises.[16] The guidance refers to the use of the negotiated procedure without prior publication which is laid down in Article 32 of Directive 2014/24/EU. This procedure allows the contracting authority to negotiate directly with potential contractors and subsequently award a contract directly. In particular the EC refers to the conditions for using the negotiated procedure without prior publication as laid down in Article 32(2)(c) of Directive 2014/24/EU. These conditions being that the circumstances are so that it is strictly necessary for reasons of extreme urgency brought about by events unforeseeable for the contracting authority, and where the time limits for the normal procedure cannot be complied with. In other words, the direct award to a preselected economic operator remains the exception, applicable if only one undertaking is able to deliver within the technical and time constraints imposed by the extreme urgency.

Measures adopted by individual countries

The war in Ukraine has had a disruptive effect on global supply chains, which were already under a great deal of pressure due to the COVID-19 pandemic. Terms such as shortages, delays, and inflation are frequently used to describe the current economic challenges. These challenges come on top of the already felt effects of the sanctions. Unavoidably, public procurement is also affected by the economic challenges. To mitigate the effects of the current supply chain issues on public procurement several countries have undertaken initiatives, clarified the application of existing legislation, or adopted measures.

One such measure worth noting is one taken by the United Kingdom, which suggests using an ‘open book’ approach for materials which are fluctuating dramatically in price. In this approach contracting authority and the tenderer do not agree on a set price but they agree that the tenderer will obtain the materials for the best possible price, which it is required to demonstrate.

Belgium and France have refrained from adopting new legislation but rather published guidance on how to use the current legal framework to combat the current economic challenges as well as on how to comply with the EU sanctions. In France a circular has been published to give guidance to contracting authorities on how to amend ongoing contracts when materials have become too expensive or unavailable. Furthermore, guidance is given on how to deal with unforeseeable events, force majeure, and price revision clauses.

In similar fashion, both France and Germany have published circulars on how to comply with the EU sanctions and what the consequences of non-compliance are. In Germany the Federal Ministry of Economics and Technology also made available a self-declaration which tenderers can fill-in in order to declare that they are compliant with the EU sanctions.

Poland has taken a different approach by adopted new legislation that applies in parallel to the already existing public procurement laws. The new legislation covers topics such as new grounds for mandatory exclusion, how to determine Russian ownership or involvement, and the fines for non-compliance therewith.

Italy has taken the legislative path by adopting laws on mechanisms that provide for leeway in contracts in case of price issues caused by disrupted supply chains. For example, the reintroduced price revision mechanism in public procurement allows for a system of upward and downward compensation for changes in price of significant construction materials. To counter possible price fluctuation a contracting authority is ordered to make reservations, in addition to which a Price Adjustment Fund is established by the Italian Ministry of Infrastructure to serve as a back-up.

And finally, in the Netherlands the government provided guidance for contracting authorities and tenderers on how to deal with the EU sanctions imposed on Russia by, inter alia¸ publishing its own FAQ.[17] In its FAQ the government goes into quite some detail on how to establish whether a tenderer falls under the ban. For instance, the government elaborates on the definition of ownership and control by referring to an EU Best Practices document published by the Foreign Relations Counsellors Working Party.[18] The government further provides guidance by giving contracting authorities and tenderers the possibility to reach out to a designated department of the Ministry of Economic Affairs and Climate Policy for the screening of tenderers. Also, the Dutch government published a document on how to apply for an authorisation as referred to in Article 5k(2) Regulation 833/2014, i.e, for an exemption to the ban as exhaustively provided for.[19] Importantly, the Dutch Government answers the question on what to do in case of an alleged infringement of the EU sanctions. It suggests using the EU Sanctions Whistleblower Tool or to reach out to the designated government departments.[20]

Conclusion

The sanctions adopted in response to Russia’s military attack on Ukraine have far-reaching consequences for public procurement. Essentially, all tenderers that are sufficiently closely linked to Russia are excluded from participating in tenders. However, determining whether a tenderer is sufficiently closely linked to Russia may in practice be quite difficult. From a more practical point of view, we hope contracting authorities are capable of properly assessing if tenderers should be excluded. The guidance given in several countries is much welcome, which assumes more will follow. We will keep a close watch on new developments regarding the war in Ukraine and public procurement law.

[1] Council Decision (CFSP) 2022/327 of 25 February 2022 amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (“Regulation 2022/576”).

[2] See Directive 2014/23/EU; Directive 2014/24/EU; and Directive 2009/81/EC.

[3] Regulation 2022/576.

[4] Council Regulation (EU) 2022/576 of 8 April 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (“Regulation 833/2014”).

[5] Regulation 833/2014.

[6] Article 5k(1) Regulation 2022/576.

[7] See European Commission, Public Procurement Frequently Asked Questions – As of 2 June 2022 (“EC FAQ”), question 28.

[8] The competent authorities per member state are defined in Annex 1 to Regulation 833/2014.

[9] Article 5k(3) Regulation 2022/576.

[10] EC FAQ, question 14.

[11] EC FAQ, question 11.

[12] Article 5k(1) Regulation 833/2014 and https://www.pianoo.nl/sites/default/files/media/documents/2022-04/circulaire_nieuw_sanctiepakket_rusland_heeft_gevolgen_voor_overheidsaanbestedingen_14april2022.pdf.

[13] EC FAQ, question 23.

[14] EC FAQ, question 17.

[15] EC FAQ, question 21.

[16] See for instance Communication from the Commission Guidance from the European Commission on using the public procurement framework in the emergency situation related to the COVID-19 crisis 2020/C 108 I/01, point 2.3

[17] The document can be found using the following link (only in Dutch): https://www.pianoo.nl/nl/regelgeving/crisis-en-inkoop/veel-voorkomende-vragen-sancties-rusland.

[18] The document can be found using the following link: https://data.consilium.europa.eu/doc/document/ST-8519-2018-INIT/EN/pdf.

[19] The document can be found using the following link (only in Dutch): https://www.pianoo.nl/sites/default/files/media/documents/2022-06/220622-handleiding-mandaat-penwoordvoerder.pdf.

[20] The EU Sanctions Whistleblower Tool can be found using the following link: https://eusanctions.integrityline.com/frontpage.