Requirements set by a financing bank cannot restrict competition in a tender co-financed using EU funds | In Principle

Go to content
Subscribe to newsletter
In principle newsletter subscription form

Requirements set by a financing bank cannot restrict competition in a tender co-financed using EU funds

If a bank denies financing for a contract for rolling stock (or other items subject to a tender) awarded in conformity with the principle of competitiveness because material collateral cannot be established in Poland, the contracting authority is required to award a contract for delivery with financing.

Beneficiaries that obtain EU funds and plan to hold a tender are subject to certain obligations laid down in Guidelines on expenditure eligibility under programmes run by the European Regional Development Fund, European Social Fund, and the Cohesion Fund for 2014-2020, issued under Art. 5(1)(5) of the Act on the Principles for Implementation of Financial Cohesion Policy Programmes for the 2014-2020 Financial Perspective of 11 July 2014. If the beneficiary is not a contracting authority in the meaning of the Public Procurement Law, the beneficiary is required to award tender contracts in accordance with the principle of competitiveness as required under the Guidelines.

Procurement processes in projects financed using EU funds are subject to rules intended to ensure compliance with community policies, and in particular the principle of equal treatment of economic operators and fair competition in access to the tender contract. When a project is implemented based on an agreement for financing, the beneficiary undertakes to comply with national and community principles, and this includes public procurement principles. If the beneficiary breaches conditions and procedures in procurement proceedings, all or some of the expenditures connected with that tender contract are deemed to be ineligible, and thus will not be reimbursable.

A bank denies financing for a contract for rolling stock

Contracting authorities awarding tenders in accordance with the principle of competitiveness usually need outside financing for the purchase. With respect to tender contracts for delivery of rolling stock, banks sometimes grant the credit facility to the contracting authority for purchase of rolling stock on condition that the purchased rolling stock is registered in the National Vehicle Register (NVR) in Poland. Only then can banks establish a registered pledge on the item delivered as collateral for repayment of the credit facility. Under Art. 42 of the Private International Law, property rights to a rail vehicle are subject to the laws of the country in which the vehicle is registered. In turn, under Art. 36(1a) of the Act on Registered Pledges and the Pledge Register, national jurisdiction is excluded in matters concerning entry in the register of pledges in accordance with that act. This means that a registered pledge can only be registered in the Polish register of pledges on the basis of a ruling issued by a Polish registry court, and a ruling issued by a foreign court cannot be recognised. Therefore, the bank cannot apply for a registered pledge to be entered in a pledge register operated by a Polish court for rolling stock registered in the NVR in Denmark.

The contracting authority cannot accept the requirement stipulated by the bank, even though it is justifiable from the point of view of the bank’s interests. If the contracting authority accepted this requirement, this would constitute preferential treatment of Polish suppliers, and discrimination against suppliers of rolling stock from other member states. In light of the principle of competitiveness, limiting the group of entities able to apply for the tender contract would be a contravention of the principles of fair competition and equal treatment under point 6.5.1 of the Guidelines. This would expose the contracting authority to the risk of the expenditures being found to be ineligible.

Solution: a tender contract with financing for the item, for example leasing

As the principles specified in the Guidelines mean that contracting authorities cannot give Polish economic operators preferential treatment, in the situation described above they need to find a different means of financing the tender contract. The answer might be to award a tender contract for delivery of rolling stock together with financing in the form of a lease.  In such a case, the contracting authority conducts a single procedure encompassing delivery and financing of the item being delivered, for example under a lease agreement. In this agreement, the supplier of the rolling stock acts as a subcontractor making available its resources to fulfil the requirements for admission to the procedure and to perform that element of the tender contract.

In the tender documentation, in addition to the technical specifications for the rolling stock on order, the contracting authority also specifies the lease conditions, such as the level of the initial payment, buyout value, period of the lease, total cost of the lease, other fees, and the margin. As the financial instrument market is standardised, the contracting authority has the option, to facilitate competition, of accepting agreement templates and tariff and commission tables used by institutions, provided that these tables meet the requirements specified in the tender documentation.

Under the Guidelines, leasing is a possible means of financing provided that it does not result in immediate transfer of ownership title to the asset in question to the beneficiary. The Guidelines list the following forms of lease that can be co-financed under an operational programme:

  • Finance lease – a lease agreement under which the risk and benefits from use of the leased asset are transferred to the lessee (beneficiary in the co-financed project). This agreement often provides for an option of purchase of the leased asset or a minimum lease period corresponding to the period of use of the leased assets;
  • Operating lease – a lease agreement under which the risk and benefits from holding the leased asset are not in general transferred in full to the lessee (beneficiary), and the period of use of the leased asset can be shorter than the period for which it is economically useable (depreciation period);
  • Sale and lease back – under this type of lease, the lease agreement is tied to a sale agreement that precedes it. In a sale and lease back transaction, the beneficiary sells the asset to a leasing firm and at the same time obtains the right to continue to use it according to the terms specified in the lease agreement. This enables the beneficiary to sell the asset in question to the lessor, and to continue using it, for which it makes lease payments.

Under the Guidelines, expenditures incurred to repay the principal under the lease are eligible expenditures. In the case of a finance lease, alternatively, the amount on the invoice for purchase of the leased asset can be expenditure of this kind, provided that the lessor is named on the application for funding as the entity authorised to incur the expenditure. Expenditure that is not eligible, on the other hand, is expenditure related to the lease agreement other than the principal of a lease payment, in particular the margin of the party providing the financing, interest on the refinancing of costs, overall costs, and insurance fees.

Double funding of expenditure, where the expenditure incurred by the lessor to purchase the leased asset under a finance lease is reimbursed, and then the payments made by the beneficiary for leasing the asset are reimbursed, is prohibited.

Mirella Lechna, legal adviser, Katarzyna Śliwak, attorney-at-law, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners