By Michael R. Geroe*
There are a breathtaking number of fundamental changes occurring in Europe right now which can have immediate, long term and dramatic impacts on your business. These changes will present both opportunities and obstacles. European commercial practices are converging with the accession of many new countries into the membership of the European Union. Concerns over health and the environment are driving wide-ranging regulations concerning so-called waste electrical equipment (e.g., used televisions, radios, microwaves, stereos, etc.). Further, the EU is adopting a new regime for the enforcement of its antitrust (or competition) policy, which will impact agreements among companies transacting business in the EU.
First wave of accession countries. Ten former Eastern bloc nations, including Poland, Hungary and the Czech Republic, will be joining the European Union (EU), on May 1, 2004. While the EU has had experience with the accession of new Member States in the past, it has not dealt with accession of ten new members at a time. There will be a second wave of accession nations, which will most likely include Romania and Bulgaria, among others. The EU has set aside funds through at least three funding instruments, to help make the infrastructure of these pre-accession member states more comparable to those of existing EU Member States. There are also funds available for the so-called "second wave" pre-accession states. These projects involve, among other things, the construction of new regional airport hubs, strengthening or extension of rail lines and roads, and modernization of water and wastewater treatment facilities. In addition to the EU funds set aside, the national governments of many, and perhaps all, of these pre-accession nations have also earmarked funds to complement the infrastructure projects now eligible for EU funding.
Why should US Companies care? American companies should care because there is a lot of money involved and a lot of project development opportunity. The EU disbursed about six billion dollars over the period 2000 to 2002 through just one of its funding instruments for pre-accession member states (the Instrument for Structural Policies for Pre-Accession). That doesn’t include funds earmarked by the national governments of those countries.
One may assume that various European companies are competing vigorously over getting these funds. That assumption is not necessarily correct. Entrepreneurs and other successful businessmen in some of these countries have concluded that trying to win projects from their government is futile, due to cronyism, corruption and general lack of transparency. The governments of many of the pre-accession countries have made varying degrees of progress in suppressing corruption and being more transparent in developing and requesting project proposals. Nevertheless, it is true that many of these governments do not have sufficient experience in properly generating requests for proposals (RFPs) for a project, or in handling the tender process when it comes to granting project awards. Many funds go untapped due to lack of appropriate advertising of projects. For example, while the national government and the EU may fund the projects, it may be the cities that need to apply for the funds. City officials or their staff may in some instances not even be aware that funds are available to them; they may not have the resources or incentive to generate RFPs or apply for funds. To pick but one example of the situation, Hungarian press reports that the Republic of Hungary hopes to review over 600 municipal project proposals to take advantage of certain infrastructure funds which will expire by May 1, 2004. As of June 1, however, there were only 50 proposals submitted for review by Hungarian municipalities.
These countries need help and have funds to pay for them; yet there may not be sufficient interest generated locally, in part for some of the reasons discussed above, to provide that help. This can provide enormous opportunities for nimble US companies.
Where’s the catch? Strings come attached to funds disbursed by governments. In the case of EU funds, these include local content requirements and project applicant citizenship restrictions. For U.S. multinational companies, this is not an issue. If you are at a smaller or mid-size company, it will mean that you need to work with one of your larger multinational partners in taking advantage of these opportunities.
Anti-corruption laws, both in the United States (through the Foreign Corrupt Practices Act, or FCPA) and in Europe, are another factor. A few years ago, some European businesses were permitted to write off bribes as business expenses on their tax forms. Since around 2000, however, European nations have adopted FCPA-like laws that prohibit the promise or provision of benefits in order to obtain or retain business from a government official. While companies can still lobby, they or their agents should be careful about running afoul of U.S. or European anti-corruption laws and directives.
Electrical Junk. The EU has determined that electronic waste, in the form of used microwaves, radios, and other electrical equipment (dubbed "waste electrical and electronic equipment," or WEEE) is growing at three times the rate of regular municipal waste. WEEE is estimated to constitute four percent of all municipal waste in the EU at this time. The EU addressed this growing problem by issuing two directives that will have dramatic effects on anyone doing business in Europe. The first directive is reactive; it requires that by Aug. 13, 2005, manufacturers provide for the collection, treatment, recovery, and environmentally sound disposal of WEEE. A plan of having consumers dump old TVs in the municipal trash does not count. Producers will have to take the used goods at no cost to the consumer, but ensure that the goods are somehow reused or recycled. The second directive is proactive in seeking to eliminate waste. It requires that from July 1, 2006, new electronic equipment be free of lead, mercury, cadmium, hexavalent chromium, and a number of other toxic substances. It requires, in short, a change of technology.
Why should US companies care? If you are shipping products into Europe that have any electronic components, from toothbrushes to telephones to computers, you will be affected by these directives. If you have facilities in Europe, they can at least be used to collect and help process WEEE. But what of the many US companies shipping product to the EU which do not have a physical presence in the EU? They must still comply; they may do so by paying a fee to a waste management processor. For those with no time to plan ahead, there are always the alternatives of paying stiff fines or discontinuing the shipment of products to the EU.
Who exactly is affected? Good question. The EU hasn’t entirely figured this out yet. If you sell radios, its an easy answer: you must devise a compliance solution. But what if you sell modems used in PCs? What if you sell both direct to manufacturers, who integrate your modem into the PCs they sell, and you also sell directly to consumers, who can easily install your modem into their PCs? Are you providing an intermediate good or a final product? Is this going to be your headache or the maker of the PC, or both? There is no clear answer to that question at this time.
What is the opportunity? Now is the time to find a compliance solution to these directives. That solution may involve lobbying the EU or particular EU Member States to help shape legislation; it may involve designating a compliance team to address the issue; finding others similarly situated to find a collective solution; making new local partners; or a combination of some or all of the above. On the other hand, if you are in the waste management business, this may be an opportunity for your to reach out to existing corporate customers to help them find compliant solutions; it could be a reason for you to enter the EU market, or to expand in that market.
Changes in competition policy. At the same time the first wave of former East bloc nations joins the EU, there will be significant changes in the enforcement of EU competition policy. In recent years, the United States has taken great strides in exporting its policies and philosophies about anti-competitive practices to competition agencies around the world. From May 1, 2004 forward, the European Commission’s (the "Commission") enforcement of competition law will be more similar to U.S. enforcement of the antitrust laws. Requirements to provide notice to the Commission (in force since 1962) over the execution of contracts, in order to receive immunity from the Commission and allegations of violating competition law, will be abandoned. A more decentralized regime will be adopted in which the Commission will try to oversee and coordinate competition policy with the national competition authorities and courts of EU Member States. The Commission will also concentrate on investigating questionable transactions. While the EU intends to foster a uniform body of competition law throughout its territory, it is unclear how long it will take to evolve such enforcement experience and such a body of law. In the interim, there may be forum shopping and other complications.
How does this affect me? This new regime is anticipated to reduce the uncertainty over the enforceability of contracts containing terms addressing non-competition, distribution restrictions or exclusive distributorships, and related provisions. Under the current regime, failure to provide notice to the Commission could place the enforceability of otherwise innocuous business agreements with these terms into question. Under the new regime such notice is unnecessary and with decentralized enforcement, disputes should ultimately be resolved in a more timely, less costly manner.
*Mr. Geroe is a partner in the International Business Group of Williams Mullen and is co-chair of the firm’s antitrust practice team. He practices law in Washington, D.C. and may be reached at (202) 293-8127 and mgeroe@williamsmullen.com. The opinions expressed in this article are solely those of the author and do not necessarily reflect of the views of Williams Mullen or its clients.
Copyright 2003.