This column's regular focus is the overlap between procurement and politics. June 2016 saw such an enormous impact on procurement with the UK's vote to leave the European Union – so what better time than now to focus on the overlap of these two fascinating topics?
Long before dozens of articles and blog posts arose post-Brexit, In-procurement has been providing an insight into the potential impacts. Much discussion with procurement professionals has highlighted the uncertainty with which many in the industry feel about their organisations and careers. Many have argued that there is no point speculating about the future when the outcomes of so much of politics and economics in the UK and Europe is so uncertain.
In reality, trading agreement will be the ultimate decider of the impacts of Brexit on procurement.
The details are not clear, but the eventual outcome will sit within one of three categories and it is absolutely possible to assess what the impacts of each of these would be. Far from waiting for events to unfold, procurement professionals absolutely should be proactive, planning ahead to shield their organisations from the risks that each scenario poses. This article will overview each of the three possible trading relationships and what each would mean for procurement.
No UK-EU Free Trade Deal
The first possibility is that the UK will leave the EU and no trade agreement (FTA) will be reached. To understand this, it is important to overview the reasons for any FTA between the EU and UK. Without one, barriers to trade across borders would be erected; these would be tariffs on goods and services, which are agreed through the World Trade Organization (WTO) for trade between countries without an FTA. There would also be non-tariff barriers (NTBs), such as variations in regulation and customs, making cross-border trade more time-consuming and costly. The idea that the EU would always trade with the UK at current levels is misplaced – with tariffs in place, UK exports to the EU (over 40% of UK exports) would become more expensive, by an average of approximately 10%. It is tempting to think that it is in the EU's interest to not restrict trade with the UK, but that is to ignore the impact that politics, lobbyists and vested interests have on trade and to deny the complex history of trade negotiations – no FTA almost certainly would harm cross-border trade.
The absence of an EU-UK FTA would impact procurement in three ways. Firstly, there would be impacts on trade and reduced competition; secondly there would be increased sourcing costs, third is impacts on procurement regulations.
Firstly for procurement, reductions in cross-border trade as a result of trade barriers would impact choice and competition within the procurement process. Currently, public sector buyers have access to goods and services from across the EU, with European firms bidding on and winning many contracts, especially within central government. These European businesses provide contracting authorities with more choice over the goods and services they source – rather than being restricted to a market of 65 million people, they have access to a market of over 500 million people, with all the diversity and dynamism that contains. This also benefits competition – if there are just a few businesses in the UK that can meet a specific requirement, European firms make for more competitive processes, avoiding monopoly or duopoly scenarios. Many are tempted to think that reducing success of EU businesses in selling to the UK public sector would mean more contracts awarded to domestic businesses. That would likely be correct, but it is not correct that this is a positive impact - it is not at all apparent that reducing competition and helping businesses grow based on nationality, not merit, is what leads countries to long-term prosperity. Of equal significance, the flip side would also be true - there would be impacts on all manner of businesses in the UK selling to the public sector across the EU, as they would be hit by tariffs and NTBs. 11% of all government contracts won by British businesses are in the rest of the EU and many of these could be impacted, with stark impacts on jobs and prosperity in the UK. For the rest of the EU, there would also be a reduction in competition and choice for contracting authorities. In essence, the UK could encounter all the challenges that typically arise in protectionist economies.
Secondly, costs of sourcing goods and services would almost certainly increase for all. Very few organisations source goods exclusively from the UK, so very few would be immune to the cost implications of tariffs. It requires little explanation as to why adding import taxes would increase costs for UK public bodies sourcing goods and services directly from the EU. Less obvious is the impacts throughout many tiers of the supply chain.
To demonstrate, the contract for a construction project for a public sector organisation in the UK could be awarded to a British firm. There would be no tariffs or trade restrictions on this contractor for this specific contract. But they almost certainly would be sourcing from Europe, whether that would be trucks from Germany, machinery from France or cement from Spain. Even if they bought everything from the UK, the materials sourced to produce the machinery or trucks will not have been mined or manufactured in the UK.
In simple terms, increasing costs at one level of the supply chain is likely to ripple through the entire supply chain. This increases the costs of doing business and the costs would be almost certainly passed on to the eventual buyer.
Thirdly, the absence of a trade deal could have profound impacts on the regulation of all manner of activities in the UK. This would include public procurement directly, as well as competition and state aid rules. Of the three trading possibilities, the absence of a FTA would give the UK an unprecedented level of control over procurement regulations.
Whilst PCR2015 would still be in place until actively replaced (this is enshrined in UK law), the UK could eventually have its own, domestically drafted procurement regulations. For the haters of red tape, a dream come true, surely? Not quite, for two reasons.
Firstly, there is a need for procurement to be regulated.
Many perceive them to be mindless bureaucracy, but EU Procurement Directives generally make a lot of sense. When spending public money, contracting authorities need to spend it in a transparent, fair and accountable way and regulation is an important part of ensuring this. Whilst continent-wide publication of tenders would not be a requirement in the absence of a FTA, adequate advertising of tenders is needed for a reason and this would quite possibly result in something akin to Contracts Finder on steroids.
Secondly, the track record of UK governments in reducing unnecessary red tape is not convincing – just look at the amount of regulation for industries such as house building and areas such as health and safety. These are not areas of regulation covered extensively by the EU, so the evidence that the UK is any less keen to regulate is somewhat scarce.
Bespoke UK-EU Trade Deal
Perhaps the most likely outcome of the UK's relationship with the EU is a bilateral FTA specific to the UK and EU. The variations would be huge in terms of application of EU laws in the UK and the possibilities for tariffs and other barriers between the UK and EU. There are two main areas that would be affected by an EU-UK FTA.
Firstly, prices and availability of various goods and services would likely be impacted. As discussed above, tariffs on goods and services from the EU would have impacts on buyers in the UK and not just when sourcing directly from other EU countries. This would also be the case for an EU-UK FTA; the deal would be very unlikely to be all-encompassing, meaning the UK would not have total access to the single market. In some industries and categories, the UK would likely lose the ability to import or export goods and services without tariffs. This means some goods may have tariffs and some others may not. This would likely create dilemmas for procuring entities – for example, there would be stressful choices to be made for a hospital in a scenario where the relative prices of drugs and medical equipment changed, likely leading to tough ethical decisions. In all other FTAs, the access to tariff-free trade varies enormously and this is a real area of uncertainly. For example, Switzerland has a FTA with the EU and has high levels of market access and integration in procurement, but South Africa, Mexico and South Korea also have FTAs, but the terms differ hugely between each deal.
Secondly, regulation on procurement would also be impacted by the EU-UK FTA. The UK would not need to adopt EU procurement rules. Under some circumstances, it would likely need to show very similar rules to the EU, so it would not have full autonomy when regulating procurement. Take Switzerland – the Swiss have their own procurement laws, but they are agreed with the EU through a bilateral deal. As a result, Switzerland may not be part of the single market, but it publishes tenders to TED (albeit indirectly through a national portal) and adopts extremely similar processes to the EU.
Harmonisation of procurement processes may well be a part of a FTA, as is the case for the “Agreement between the Swiss Confederation and the European Union on certain aspects of public procurement”, agreed in 1999. But other incarnations of an EU-UK FTA are certainly possible. The EU has FTAs with South Africa, Mexico and South Korea, but these are far more limited. Switzerland does not have full market access, but the aforementioned certainly have less access and procurement market integration and harmonisation are very limited.
The two above points are not unrelated – the level of market access and regulatory autonomy are closely intertwined. If the UK wants almost unlimited market access, it will need to accept extensive harmonisation of standards and regulations, probably including public procurement. If it is willing to accept less market access and more tariffs on imports and exports, then it will likely have more autonomy on regulation, including procurement. The more distant the trade deal, the more autonomy the UK would have over law-making, including public procurement, and vice versa.
European Economic Area Membership
The third and final option for the UK is the European Economic Area (EEA). The EEA is the single market across Europe, containing all members of the EU, as well as Iceland, Norway and Liechtenstein. This would have implications for both the trading relationship and regulation of procurement.
Firstly, in terms of the trading relationship, EEA membership would present no additional barriers to trade between the UK and EU, including tariffs and NTBs. Procuring organisations in the UK would still have access to directly source goods and services from across the single market without tariffs. More significantly, there would be no increased costs (beyond currency volatility) from subcontractors who source their goods and materials from the single market. Producers who provide goods to the UK public sector who source their materials from across the EU would also be able to keep their costs consistent. With EEA membership therefore, procuring entities in the UK would not have cost increased costs passed on to them through the supply chain.
Secondly, procurement regulation would also remain unchanged. EEA membership is very similar to full EU membership and regulation of the procurement industry would be almost unaffected if the UK joined the EEA. Public organisations in the UK would still be governed by EU procurement rules – in the short term they would of course still be covered by the EU Procurement Directive, but all future Directives would also be needed to be transposed into UK law. UK organisations would still need to publish to TED and would need to provide fair and non-discriminatory access to opportunities for suppliers across Europe.
Beyond the application of future EU Procurement Directives, EU rules on state aid and competition would also continue to be applied in the UK, now and in the future. This would impact the availability of some mechanisms for UK government to intervene to protect UK businesses in the UK – steel is of particular salience. But as always, the flip-side is also the case – UK businesses would benefit when their competitors in other EU countries are not given government backing. However, EEA membership would not just be a return to business as usual for UK procurement, for two reasons.
Firstly, services are not currently fully liberalised in the EU single market. If the UK joined the EEA, future liberalisation would allow freer movement of services across EU states. For procurement, this would mean opening up of huge opportunities for British businesses selling to other EU governments (services are around 80% of the UK economy). For procurers, the industry is part of the knowledge economy. But not much procurement expertise is shared across borders – removal of services barriers to trade could encourage more cross-border services such as procurement consultancy.
Secondly, the EU has reached a FTA with Canada, the “Comprehensive Economic and Trade Agreement” (CETA), which is due to be ratified by both parties. This includes extensive procurement chapters, opening up procurement more than with any other non-EU country and eliminating 98% of tariffs. For business, opportunities across the whole of the Canadian public sector will open up, with central and sub-national public sector bodies included in the deal. Meanwhile, this really will really open up the public sector of the EU to Canadian firms – if the UK joined the EEA, there would likely be big increases in the number of Canadian businesses taking part in tenders from the UK public sector.
Whilst EEA membership is extremely similar to the current regime in the UK, its political feasibility is another topic entirely. Countries with EEA membership have all the rights of the single market, but also all of the obligations. This includes free movement of people – despite the evidence of the overwhelming contribution this makes to the UK economy, this might be a step too far politically for government.
So this article has not addressed many of the short term impacts of the Brexit decision on procurement. From currency fluctuations, project delays and political fallout, these will be numerous. Rather, this article has taken the longer view, trying to paint a picture of what procurement could look like in five or ten years. So much depends on the trading relationship that the UK adopts. In the post-Brexit era, the UK will face serious choices about the relationship with the EU that it adopts. There will be strong correlation between sacrificing some autonomy over regulation and achieving single market access. The precise configuration of the resulting trading relationship is definitely unknown. But it is a known unknown – we know what the likely options will be and the likely outcomes of each option, so it really is on procurement to act now in the interests of their organisations and all the end-users of public services.
On 27th July, Luke alongside our Procurement Officer, Arron Fieldsend, will be presenting a seminar on the procurement implications of Brexit. The session will take place at Carlton Park Hotel, Rotherham and both buyers and suppliers are invited.
Please call 0114 407 0056 or email email@example.com for further information.
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