The effect of “Brexit” on UK public procurement legislation and the application of EU State aid rules in the UK

Introduction

This note considers issues relating to the extent to which the UK’s exit from the European Union might lead to changes to domestic procurement legislation and whether, post-Brexit, restrictions on government subsidies might continue to apply.

In summary:

• the extent to which existing UK procurement legislation, which implements EU procurement directives, might need to be amended substantively, post-Brexit, would depend primarily on the type of relationship which the UK negotiates with the EU and the extent to which the UK would continue to have access to the “single market” (that is, the EU’s internal market). Full access to the single market should normally entail continued application of EU procurement legislation.  If the UK were to forgo access to the single market, additional policy choices are likely to become relevant, such as whether the UK should remain a party to the Agreement on Government Procurement (GPA), a World Trade Organisation (WTO) “plurilateral” agreement. It would seem likely that the UK would choose to do so as the GPA would give UK businesses access to the procurement markets of the EU and a number of other major trade partners. The GPA entails compliance with rules and obligations which are in most key respects substantively the same as the rules and obligations that apply under the current EU procurement directives. Under this scenario too, therefore, post-Brexit procurement legislation should remain in most key respects substantially the same;
• EU State aid rules could similarly be expected to continue to apply to the extent that a post-Brexit agreement with the EU involves continued access to the single market. The application of the EU State aid rules, might be more limited in scope, in circumstances where the UK’s access to the single market is limited to specific sectors (although our current understanding is that this type of approach is not favoured by the EU). However, even if EU State aid rules were not to apply to the UK post-Brexit, restrictions on the ability of the State to subsidise UK companies will continue in some form, not least as a result of WTO rules.  At the same time, and absent the introduction of a specific remedies regime, the remedies available to challenge a subsidy would be weaker.

Do EU procurement rules continue to apply in the UK, post-referendum?

For the moment, the UK remains a member of the EU and this entails continued compliance with EU law obligations, including continued implementation of the EU procurement directives into domestic legislation.

Following the UK’s exit from the EU, what would domestic procurement legislation look like?

The extent to which the legislation would require substantive revision would depend primarily on the kind of relationship which the UK negotiates with the EU, and the extent to which the UK wishes, and is able, to maintain access to the EU’s internal market, which is a single market within which there is freedom of movement for goods, services, capital and persons.

A lot has already been written about the “Norwegian model” which permits full access to the single market to non-EU Member States by means of membership of the European Economic Area (EEA). However, this model is predicated on full compliance with EU legislation which affects the single market, including public procurement legislation. Under this scenario, therefore, there should not be a need for any substantive changes to the UK procurement legislation.

If the UK were to forgo access to the single market, revisions to domestic procurement legislation would depend on other policy choices such as whether the country should remain a party to the GPA.

The GPA is a non-obligatory multilateral agreement between certain members of the WTO which regulates the basis on which GPA signatory parties give access to foreign suppliers to their government procurement markets. It would seem likely that the UK would want to remain a party to the GPA as this would give UK suppliers some access to the government procurement markets of not only the EU Member States but also the United States, Japan, and Canada among other countries. It is also noteworthy that China is in the process of negotiating accession to the agreement. Access to the EU procurement markets would, however, be more restricted than now, given that the scope of the GPA is narrower than the scope of the EU procurement directives.  

Being a GPA party does not, of course, necessitate continued compliance with the EU procurement directives. Accordingly, it would, in theory, be possible for the UK to replace current legislation with a completely new set of procurement rules. However, there are important limits to the extent of this exercise. This is because signing up to the GPA entails compliance with the relatively detailed provisions of that agreement. Indeed, the EU procurement directives are themselves compliant with GPA rules. In this regard it is instructive to note that in the context of drafting the 2014 EU procurement directives, the ability to introduce greater flexibilities in EU procurement legislation was limited in some respects by the necessity to ensure that the new rules remained consistent with GPA obligations.

As it should be obvious from the above, the single market or WTO-based scenarios are comparatively straight forward options, in terms of their likely effects on UK procurement legislation. What would complicate the picture further, is bilateral agreements with the EU that would allow only limited access to the single market (for example, in relation to specific economic sectors, such as energy or transport, but not others), or a free trade agreement (which commonly would extend only to goods).

Under such scenarios, the UK would be faced with the dilemma of whether it would be preferable to (a) continue to comply with EU procurement legislation only in relation to the sectors covered by an EU bilateral agreement and introduce domestic legislation for all other purposes, or (b) keep procurement legislation essentially in its current form (as this would also ensure compliance with the GPA).

However, current indications suggest that a piecemeal approach to the single market is not one which is favoured by the EU. If this is confirmed, that would mean that this type of dilemma and the possibility of having to follow this kind of more complex legislative approach in procurement regulation is unlikely to arise.

If the UK were to forgo access to the single market, is it possible that the country might choose to dispense with procurement legislation altogether?

This would seem unlikely given the negative repercussions that this is likely to have on obtaining value for money in the context of public procurement. Separately, it would seem likely that the UK would want to ensure that UK companies continue to have some form of access to the public procurement markets of EU Member States and a number of other major trade partners. As explained above, this would entail, at the very least, compliance with the detailed provisions of the GPA.  

If the UK were to forgo access to the single market, could the UK enact legislation which restricts access to public contracts to UK companies only?

Absent any reciprocal arrangements with the EU or indeed, third countries, for granting access to each other’s public procurement markets, this might in theory be possible. However, it would seem unlikely that such an approach would find much favour, not least because this option too limits the extent to which UK public bodies can obtain value for money in their procurements.

In addition, if the UK were to exclude non-UK companies from its public procurement market it would invariably mean that the UK cannot be a GPA party and, therefore, GPA parties would not be obliged to offer UK companies access to their public procurement markets. That would limit the reach of many UK companies and hamper their potential for growth. For that reason too, therefore, it would seem unlikely that the UK would want to pursue this option.

What about EU State aid rules?

As noted above, for the moment the UK remains a member of the EU and, therefore, EU law continues to apply, and that includes EU State aid rules. Once the UK ceases to be a member of the EU, compliance with EU law – including State aid rules – will normally cease to apply. However, as discussed earlier in relation to public procurement, if the UK and the EU Member States agree that the UK should continue to have full access to the single market, this would be expected to entail continued compliance with EU legislation relating to the single market, which would include the EU State aid rules.

If an agreement with the EU provided for a more limited access to the single market, so that for example, access were limited only to specific sectors, then the application of EU State aid rules is likely to be limited to those sectors. However, as noted earlier, current indications suggest that the EU is not interested in this type of piecemeal arrangement.  

If the UK were to forgo access to the single market, would it then be possible to disregard EU State aid rules?

Yes. Under such scenario EU State aid rules will not be applicable in the UK. However, whilst this might allow UK governments greater flexibility to subsidise UK companies, it is very likely that there would continue to be important curbs on the State’s ability to grant subsidies. There are two key reasons for this, namely, restrictions under WTO rules and the possibility that the UK might introduce provisions in its legislation to restrict the State’s ability to grant subsidies. These issues are considered below.

As a WTO member the UK would need to comply with its WTO obligations, including the Agreement on Subsidies and Countervailing Measures. This agreement essentially prohibits WTO Members from granting subsidies. However, under these WTO rules companies would find it more difficult to pursue complaints against State aid subsidies to competitors, than under EU rules. Under EU rules, other than in specific circumstances, State aid cannot be dispensed without prior notification to, and approval by, the European Commission. At the same time, affected parties have the option of complaining to the European Commission or where appropriate, of taking action in the national courts. WTO rules on subsidies are by comparison less draconian and essentially provide for a dispute-settlement procedure through which an affected WTO member may seek the withdrawal of the subsidy or the removal of its adverse effects. An affected WTO member also has the (alternative) option of carrying out its own investigation. This may lead to the imposition of additional (“countervailing”) duties on subsidised imports that are found to cause injury to its domestic market. Indeed, to the extent that the UK were to subsidise UK companies at the expense of EU companies, this could lead the EU Member States to impose significantly increased tariffs.

One obvious advantage of the WTO system, from the UK Government’s perspective is that, it would be for the UK Government to take a view as to whether or not a proposed subsidy measure would be consistent with WTO rules – rather than having to apply to the WTO or some other third party for clearance before the implementation of the measure. That would generally simplify and speed up the process for granting State aid.

However, over and above these considerations, it would seem unlikely that the UK would want to sanction the widespread use of subsidies (or other selective measures involving State resources) that can distort domestic competition, other than in exceptional circumstances where public interest considerations outweigh the damage that the distortion of competition can cause.

In this regard it is worth noting that, Swiss law incorporates provisions to the effect that public authorities should not adopt measures which distort competition, and these may be taken to have a similar effect to State aid rules. Following the UK’s exit from the EU, the UK might decide to adopt similar provisions in its domestic legislation, so as to limit the State’s ability to distort competition and ensure that the competitiveness of the UK market is protected and maintained. Such initiative, might also involve the introduction of procedures through which a particular Minister or indeed, the Competition & Markets Authority (CMA) is responsible for authorising State aid on certain (exceptional) grounds.

Even if the UK were to adopt domestic legislation that restricts the grant of State resources for the purpose of conferring a selective advantage on certain undertaking(s) that can distort domestic competition, the extent to which competitors or other interest parties might be in a position to challenge effectively such measures is even less clear.

As things stand, public decisions to grant subsidies would be judicially reviewable. However, ultimately the effectiveness of domestic anti-subsidies legislation might depend on the extent to which the UK is prepared to introduce a specific remedies system, that might include, for example, complaint procedures and a regulator such as the CMA.