Whether we like it or not Brexit is a reality we must all prepare for. While there are many who are unhappy with the outcome of the referendum and subsequent actions such as the Article 50 notice, the facts are that the notice to exit the EU has been served and negotiations around the terms of the exit have commenced. The Queen’s speech contained eight proposed Brexit ‘enabling’ Acts. Further, the European Union (Withdrawal) Bill has now been published. Against this background we need to understand what this means for business at a practical level which is a key area for consideration.
The focus of this article is public procurement. According to “Government at a Glance (2015 edition) OECD Statistics”, more than 31% of public procurement in the UK is outsourced and public procurement accounts for more than 14% of GDP. That means circa 4.5% of GDP could be used differently as a valid policy tool by a combination of the UK government and its public bodies, devolved government and local authorities.
Current Legal Framework for Public Procurement
Currently, UK public procurement is governed by EU law, principally the Public Sector Directive, the Utilities Directive, the Concessions Directive and the Defence Directive. These Directives are transposed directly into UK law by UK statutory instruments. Scotland (having devolved responsibility for everything except Defence) has similar rules.
As we leave the EU it is expected we will continue with substantially the same rules. Exactly what that means is yet to be determined because if you’re not “fully” in the EU then the procurement regime cannot fully apply. Examples of areas that need to be clarified are publication in the Official Journal, resolution of disputes and interplay with the EU Treaties such as Article 107. Each of these areas need to be considered in detail including any reciprocal rights that may be granted from any EU exit or trade deal (as is the case with the “Norway model”). These are not minor points to be worked through in Brussels and Whitehall, they are in themselves significant policy decisions that can affect how 4.5% of our GDP is spent.
Longstanding UK Policy Position
The UK has been at the heart of ensuring open competition in EU public procurement and has been a thought leader in ensuring a fair, open and transparent regime where ancillary local interests have little influence. One example of this is the Delors Commission, which many would argue was the pivot point for harmonisation in the interests of free trade, namely the single market. This is related to Whitehall’s clear position that free trade is in everyone’s best interests, both consumer and taxpayer. In theory, this should deliver a lower-cost procurement. However, when the broader social costs are considered (in line with those member states who consider the EU as much a social and economic alliance), the costs may be substantially higher and market distortion can be amplified if elements of the supply are below real cost due to third party state actions. Has the time come to look at our approach to public procurement with fresh eyes and to restrike the balance in favour of protecting UK jobs?
Effect of Current Law
The effect of the current law(s) is that, with some limited exemptions which are largely limited to defence and security, any outsourcing must be competed on a prescribed basis. This can be broadly summarised as fair, open and transparent competition with little ability to favour local interests (although community benefits can be taken into account) in respect of construction/manufacturing, support or service provision. This is a perfectly valid concept and consistent with the standard procurement aim, ‘lowest cost that does the job’, except that in a global market not everyone plays by the same rules. These conditions, designed to ensure fairness, can result in government being unable to support and protect its own industries. Many would argue this is competition at its best, others would argue this is the ugly face of globalisation.
Consider a recent example of the government’s hands being tied by procurement law (including state aid), namely the extensively reported issues around UK steel manufacturing, particularly the threatened closure of Port Talbot. Whilst a complex issue, steel prices (including those used in many public procurement projects) were substantially below the costs of production due to Chinese over production allegedly facilitated by state support. Whatever your view of competition and the role of the free market, this scenario must be considered a failure, principally a failure of regulation as the law required competition and price competition whilst simultaneously being unable to prevent alleged market abuse.
Opportunities for Change
There are a number of potential avenues to address the scenario of the alleged Chinese dumping of steel below cost but, given the lack of agreements with China around state aid and public procurement, practically the only tools available are tariffs which currently sit at an EU level only. These are always a blunt instrument and often result in tit-for-tat retaliation, for example, the US currently imposes a 266% tariff on some Chinese steel imports. It is, however, possible to address this issue by changing procurement law to allow local interests to be properly considered both in setting the specification to protect local interests and to restrict or remove the ability to challenge these impositions of local interest. This approach has the advantage of being much lower key and unlikely to result in retaliation. It would involve striking a very delicate balance between the legitimate protection of local interests and wholesale protectionism which risks an uncompetitive UK industrial base becoming exponentially more expensive if it is not competitive in the private sector.
Examples from Third Party Nations
Consider the US public procurement model which frequently mandates US content. Similar requirements are common in other places, for example, the UAE and India where public procurement is considered an opportunity to kick start private sector capability. Food for thought and something worthy of broader consultation as the UK moves to what must ultimately be an independent public procurement regime.