Thoughts on Brexit - Five Predictions for Public Procurement
The initial referendum dust may have settled but it's still far from clear what shape Britain's future relationship with the EU will take. Those of us who campaigned on the Remain side have gone through the initial three stages of grief: denial, anger and bargaining (in particular, over how Article 50 should be invoked). All that remains for us is depression or, eventually, acceptance. However even if we accept the political reality of Article 50 being invoked, no one can predict exactly how that process will unfold. One possibility is that a second referendum will be held on the terms negotiated for exit - although politicians will naturally be cautious about re-opening Pandora's box and there is disagreement about whether this could stop the withdrawal process. With no immediate signs of the process being initiated, the conclusion of a two-year negotiation grows closer to the end of the current Parliament, meaning an election may determine Britain's final position. Naturally other Member States will proceed according to their own political timetables and constraints.
As we draw breath before the autumn, here are some reflections on what Brexit may mean for public procurement regulation both in the UK and the EU.
1. A complete rewrite of the rule book is unlikely
Unless relations between Britain and the EU-27 deteriorate markedly in the next few years, it is hard to imagine free trade being abandoned. The terms on which this takes place, and in particular the extent of any restrictions linked to limits on free movement of people, will need to be negotiated. However even if the Canadian model is adopted (i.e. the UK is not willing or able to sign up to anEEA-style arrangement) this would encompass maintaining substantially open public procurement markets, meaning the existing rules would continue to apply. It seems unlikely that public procurement would be high on the list of laws to be rewritten in the UK, not least because the most recent overhaul reflects close UK involvement. That said, the government may come under pressure from particular sectors to remove some of the less popular rules - see the discussion on protectionism below.
A further reason why major departures from the current rules are improbable is that the WTOGovernment Procurement Agreement- which the UK will presumably seek to accede to in its own right - sets very similar requirements to the current EU legislation. One difference is that while the EU procurement directives (and therefore national implementations such as thePublic Contracts Regulations 2015) apply generally to public contracts unless they are below threshold or subject to a specific exclusion, the GPA only applies in respect of the goods, services and works set out in the coverage schedules. As it stands, the scope of coverage for EU countries under the GPA is fairly comprehensive, however the UK could opt for more limited coverage if it wishes to protect certain industries or contracts from competition. This would result in equivalent restrictions from other GPA parties, which may not be a price worth paying.
Between the need to maintain trade with the EU and WTO members, we are unlikely to see a rewrite of the procurement rules, at least in the short term. The UK will be put in a difficult position when the next round of updates to the EU rules takes place, as it will not have a seat at the table. More immediately, the UK will lose its judges on the European Court of Justice while continuing to be subject to its interpretations of EU law, for example where British firms compete for contracts in Germany or France. Both these developments mean the UK will be a 'rule-taker' rather than a 'rule-maker' when it comes to public procurement. Far from creating more policy flexibility, Brexit is likely to entrench the existing rules until such time as others decide they should change. British input into the technical developments and harmonisation necessary to make e-procurement a reality will also be diminished.
Leaving the EU customs union would allow the UK more flexibility to negotiate deals with third countries (one of the Brexit campaign's many promised benefits) however it would also introduce a new layer of that odious red tape they assured us would vanish: in order to export to EU countries, the origin of goods and services would have to be proven. In January of this year, the Commission proposed anew regulationwhich would introduce price penalties on goods and services imported from countries which have not opened their public procurement markets to EU companies. While this has not yet been adopted, it is easy to see how it would form a useful backstop for the EU-27 in any negotiations on access to public contracts with the UK. Finally, remedies for breaches of the procurement rules will in the short term remain in place, although the piecemeal nature of the remedies directives mean they are long overdue for consolidation.
2. Temptations of protectionism will be hard to resist
The debate about protectionism vs. openness in public procurement is likely to become more prominent following Brexit, as the EU rules are widely perceived as the reason why some public contracts are awarded to foreign firms. As I pointed out in aprevious article published in the Guardian,the number and value of contracts awarded by UK public authorities to foreign firms is tiny and the causal link between the EU rules and foreign companies winning contracts is tenuous. So which countries apply protectionist public procurement regimes and what have the effects been? Arguably the United States, with its numerous 'Buy American' initiatives and limited opening up of state procurement to outside competition, ranks high on the protectionist list. While EU countries make some €352 billion in public procurement accessible to US companies, the equivalent figure for the US is only €178 billion. This was one of the motivating factors behind TTIP, which seeks to remove state barriers in particular. As the UK may no longer be party to TTIP or its Canadian equivalentCETA, it could apply restrictions on companies from these countries accessing British public contracts, at least until such time as it can negotiate its own deals. This however sits uncomfortably with the positions taken by several pro-Brexit ministers, who support stronger trade links with the rest of the world. For further discussion of the impact of Brexit on TTIP, see ProfessorChris Yukins' blog.
Identifying the precise effects of protectionist policies on quality, value-for-money, short and long-term competitiveness and other procurement desiderata is not straightforward. All too often our assumptions about the impact of protectionist policies reflect our ideological orientation: pro-trade or pro-localism. In theory, it should be possible to study the impact of individual protectionist policies (for example, a preference for British steel) in a controlled way by inviting some departments or local authorities to apply this policy and others not to. But the political and legal reality is that such policies are adopted or removed in a blanket manner, most often in response to pressure from the industries concerned or in retaliation or exchange for similar policies adopted by our trading partners. The result is a dearth of evidence about whether such policies work to achieve any of their aims.
3. Environmental and social standards may lose out
The 2014 directives saw a major reorientation of the EU public procurement regime towards environmental, social and other 'horizontal' objectives. While these remain voluntary for public authorities to apply, ECJ case law has increasingly emphasised the freedom which they enjoy to depart from market-driven or cost considerations when awarding contracts (see CaseC-368/10Commission v the Netherlands and CaseC-115/14RegioPost in particular - commentary on both cases appears below and in theanalysissection). The UK's record on sustainable procurement is decidedly mixed; it lags behind the Scandinavian countries, the Netherlands and Germany when it comes to applying high environmental and social standards in public contracts. This also means that UK procurement is not as innovative or SME-friendly as it might be, due to the incessant focus on lowering costs and the tendency to focus on processes rather than outcomes. Initiatives in areas such assustainable foodandtimberraised the ambition level, but energy and departmental resources for these appear to have been lost in recent years.
The2012 Social Value Actdemonstrated that domestic political will exists to further social objectives through public procurement. To build upon this, a robust approach to measuring outcomes and progressive development of the Act to provide a clearer mandate is needed. It is disappointing, if understandable, that most of the effort put into implementing it appears to champion strictly local interests to the neglect of broader environmental or social considerations. With councils under more or less severe budgetary pressures, they aim to use procurement to support local projects which might otherwise not receive funding. But if Brexit Britain is going to be truly outward looking, we need to embed policies on climate change and human rights throughout public sector activity. We will no longer be able to rely on the EU to take the sometimes unpopular decisions which protect natural resources, air, water and soil quality, workers' rights and safety standards. A reorientation of trade towards China and the Persian Gulf would also severely test these standards.
4. Competitiveness and costs
Will UK public procurement become less competitive after Brexit? This depends very much on the general economic climate, as well as any additional costs of doing business here for EU firms. Governments will do their best to maintain an attractive business environment, and this may include specific incentives for foreign businesses to locate here. Public contracts have remained more or less stubbornly resistant to direct cross-border awards; outside of the defence sector, this accounts for as little as 2% of contracts advertised in the Official Journal. Any factor which makes it riskier or more costly for EU businesses to sell to the UK public sector could send this figure lower still. Does it matter? I would argue that levels of competition for many larger public sector contracts in the UK are already dangerously low, and that this is compromising both value for money and the quality of public services. More competition is not always the answer, but faced with a choice between two or three domestic 'devils-you-know' and a wider field including a few continental contenders, I would prefer the latter.
5. Transparency and corruption - yes it can happen here too!
We are in serious trouble if political interference in the award of contracts becomes normalised. Britain prides itself on having low rates of public sector corruption and indeed compared to many countries we are very lucky. However corruption in public procurement is multifaceted - it's not just about awarding contracts to companies owned by your family members or political donors. It can also take the form of intentionally running procedures in a manner which gives an unfair advantage to certain firms, for example to an incumbent if very short tender periods are applied. Where public contracts become politicised, for example because they are highly visible or relate to core public services, they can easily become subject to pressures which are incompatible with value for money and fairness. On the other hand, lack of transparency and public knowledge about contracts can be equally dangerous - we need look no further than defence sector contracts for evidence of the impact which looser rules on procurement can have on cost and effectiveness.
Key tenets of the EU public procurement regime such as equal treatment, transparency and proportionality serve to underwrite sound procedures - so it is vital that these are safeguarded within domestic procurement law. While remedies will still be available to companies who feel they have been treated unfairly, this may need to be supplemented by an independent procurement ombudsman or authority on the model adopted by Canada and Sweden - as the European Commission will no longer play the role of neutral enforcer of the rules. I have argued that the existing remedies system in the UK is biased in favour of larger companies who can afford the high costs of litigation via the courts. While theMystery Shopperservice operated by the CCS offers some recourse to smaller operators, it does not serve as a general enforcer of procurement standards throughout the public sector. Brexit may lead to a perception that the existing rules on procurement do not have the same legal force, so the Government will need to make clear its plans for ensuring fair and transparent procedures across the public sector.
 Source: European Commission, D-G Trade COM (2016) 34 final at page 2.