PM May's Speech has brought limited clarity of Brexit impact on procurement, but can consequences be significant?

In her Brexit speech of earlier today, Theresa May PM has clarified a few things, including that the model for a future relationship between the UK and the EU that she is "proposing cannot mean membership of the single market". She has also indicated that her Government would not consider an open-ended transitional arrangement because that could plunge Britain intopermanent political purgatory”. This seems to indicate a very clear direction towards a so-called hard Brexit that generates risks of an actual cliff edge (or a very short 'smoothing period') for UK and EU economic operators, including the public sector, businesses and consumers.

However, she has also expressed that her plan includes the priority for the UK to "seek the greatest possible access to [the EU's single market] through a new, comprehensive, bold and ambitious Free Trade Agreement". And that she hopes that this can be done in parallel to the Article 50 TEU negotiations, so that it is in place within 2 years. Prof Peers has aptly synthesised what came to mind.

It is difficult to anticipate the implications of all these contradictory goals in the area of public procurement regulation, but three main alternative scenarios seem now on the table:

  1. successful completion of a UK-EU FTA that can be in force at the time the UK leaves the single market, and which allows for continuity of EU and UK commitments under the WTO rules (notably, the Government Procurement Agreement, GPA) [FTA scenario];
  2. no UK-EU FTA (either at all, or because it is incomplete/in negotiation at the time the UK exits the single market), but agreement (not only between UK and EU, but also by their international trading partners) of  'workable' arrangements based on WTO rules (including GPA) [WTO/GPA safety net scenario]; and
  3. no UK-EU FTA and no workable agreement under WTO rules (including GPA) [unregulated international trade scenario].

The implications of each of these scenarios in the area of public procurement would, in my view, be as follows: 

  1. A tailor-made FTA would probably include features similar to the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA), and this would require full compliance with the EU public procurement acquis. In short, this would imply the continuation of the status quo and no need for reform of the Public Contracts Regulations 2015 (although that would be possible because the current transposition followed an extremely restrictive copy-out approach that severely constraints its potential to unleash better procurement practices and results). 

    Access to GPA procurement markets would depend on the UK’s status under WTO GPA and the continued acceptance of the EU's coverage commitments by the other WTO GPA signatories, but this option could easily secure continued access to GPA markets because the UK and the EU could make a solid case that the trade reality in their procurement markets has not changed in a material way.

    This would be possible if the UK Government accepted the need for continuity in the public procurement area, which is something PM May hinted would be happening on a sectoral basis by stressing that the UK-EU FTA "... may take in elements of current Single Market arrangements in certain areas ... as it makes no sense to start again from scratch when Britain and the remaining Member States have adhered to the same rules for so many years." 
     
  2. Failure to complete an FTA could still allow for WTO GPA-based trade in public procurement markets, not only between the UK and the EU, but in the wider context of GPA markets (although in my view this would be less likely because a breakdown in the trade relations between the UK and the EU would most likely trigger calls for renegotiation, at least of coverage, from other GPA signatories).

    In that case, if the UK sought to rely on the WTO GPA only, it would need to clarify whether it can retain its status as a party in its own right or -- having lost derived membership linked to EU membership -- seek fresh accession to the GPA. Either way, the scope of coverage of the reciprocal commitments between the UK and the rest of GPA parties (including the EU) would need to be clarified and probably renegotiated, with the UK facing pressure to accept deeper commitments than currently negotiated by the EU en bloc (and the EU's commitments may at the same time be also under pressure to be renegotiated due the lower volume of the EU27 procurement markets as compared to the EU28). The main risk for the UK implicit in this option would concern the discontinuity of access to the procurement markets of GPA parties (including the EU), as well as having to make additional coverage concessions in order to retain (similar to) current access to those markets.  

    Additionally, the UK would still need to convince the rest of GPA signatories (including the EU) that its procurement system complies with the general (minimum) requirements of the agreement. The easiest way of doing so would be to retain current rules that implement the EU public procurement acquis, which ensure compliance with the EU’s (and UK's future) international obligations under the WTO GPA. In that regard, the possibility of introducing significant reforms to the Public Contracts Regulations 2015 would also be limited, or at least conditioned by the risk of triggering what could potentially be protracted negotiations on substance of procurement regulation, in addition to the above mentioned negotiations on (adjustment of) coverage.
     
  3. The implications of the final scenario of unregulated international trade are clear, at least from a legal perspective. "Hard Brexit", ie no trade agreement of any kind combined with loss of WTO GPA membership (or a workable arrangement ensuring continued reciprocal favourable treatment while access is (re)gained), would imply loss of access to EU and worldwide procurement markets (either totally or partially). Clearly, it would also provide the UK with an opportunity to close up its procurement markets to non-domestic bidders, but this would severely damage the UK public sector in many different ways, including potential higher prices, which does not seem like a desirable policy road to take. Either way, this would likely have a major impact both on the UK public sector and in its business community, particularly that reliant on cross-border direct and indirect procurement-related trade. At the same time, it would open the possibility of a complete overhaul of public procurement rules in the UK, including the repeal of the Public Contracts Regulations 2015, with or without a replacement. However, it would also imply complete isolation of UK (public procurement) markets and is clearly an undesirable state of things.

All in all, then, it seems that if the UK Government actually seeks to ensure that free trade remains a feature of the UK's economy, particularly through continuity of WTO (GPA) based trade and the conclusion of a "new, comprehensive, bold and ambitious Free Trade Agreement" with the EU, there is limited scope for reform of the Public Contracts Regulations 2015 other than to overcome the self-imposed limitations derived from the copy-out of a set of rules that is meant to be developed and fleshed out by the Member States. If that is seen as a worthwhile exercise, it can start tomorrow and irrespective of Brexit, because the regulatory space exists under currently applicable EU public procurement acquis. I am not optimistic that this will happen, though (and have not been since before the referendum).

Some thoughts on Brexit and its implications

©  Barry Blitt / New Yorker

© Barry Blitt / New Yorker

Brexit occurred and it is difficult to overcome the shock and focus your thoughts on what’s next. 

From a legal perspective, in my mind, the only clear thing is that nothing has yet happened and nothing will happen until Article 50 TEU is formally engaged. With Cameron leaving, the Tory leadership in the air and the Labour leadership under mounting pressure, the problem is though that the EU is going to push hard to receive the Article 50(2) TEU notification as soon as possible. Political pressure has started to mount, although Chancellor Merkel seems intended to at least soften the tone of the opening salvos by representatives of the European Institutions.

Nevertheless, the pain of waiting for an internal UK decision to pull the Article 50 TEU trigger may be too big a bullet to bite, particularly if the bleeding in the financial markets continues and there are further signs of internal destabilising pressures by Eurosceptic groups (from France, the Netherlands, Denmark… or elsewhere). In the end, for the EU, every concession to the UK in this time of turmoil is a very dangerous path—as the echoes of Le Pen’s statement that ‘The UK has started a movement that will not stop’ clearly evidence.

Reasonably, the only way to show ability to manage the situation in an orderly and effective way is to get started as quickly as possible with the negotiations leading to an Article 50(3) TEU withdrawal agreement, either upon request of the (new) UK Government or unilaterally by an EU that may well get to the limit of its patience sooner rather than later and seek ways to construct the necessary notice as served in order to force the UK to sit at the negotiating table. All legal possibilities must certainly be under consideration in different corners of the EU.

In my opinion, and strictly from the perspective of EU law, there are good arguments to consider that a prompt Article 50(1) TEU notification is part of the duty of loyalty and sincere cooperation under Article 4(3) TEU. However, it also seems clear that getting the clock ticking towards the 2-year guillotine when one of the parties is not ready or willing to negotiate may be more than counterproductive. And, more generally, it also seems clear that there is no obvious enforcement mechanism for such duty to notify (if it indeed exists) and that any attempt by the European Commission to bring the UK to the Court of Justice of the European Union would not only be self-defeating but also probably ineffective in the long run. So, all in all, it seems that EU law is very limited in its ability to overcome classic problems of enforceability of international public law when the issues that need addressing are classical problems of strategic behaviour by a sovereign state.

To complicate matters further, the situation is somewhat surreal and difficult to tackle from a legal perspective because the significant complexities of internal UK constitutional law cast a very long shadow on the ‘realness’ of Brexit and the (theoretical) possibilities to disregard the result of the referendum either at the Westminster Parliament or in the corridors of Whitehall. Moreover, as lawyers, we are in danger of falling into a fallacy of presumed effectiveness of the law as we conceive it, particularly if we forget that enforcing EU law against the UK will be particularly difficult and time-sensitive in any given scenario.

Thus, the sad reality is that, more than ever, law is now a slave of politics and the existing legal framework will undoubtedly be bent beyond recognition in order to accommodate whatever is politically feasible at any given point of the impossible to anticipate chain of developments. This creates growing frustration because the impossibility to enforce the legal framework may well lead to its disregard, which threatens to have long-lasting damaging effects on the trust in the rule of law in the UK and the EU.

Hard times for legal pragmatism, which probably advises us to stay away from the craziness of the initial developments after the Brexit referendum and save our thoughts for later, when specific proposals reach the public sphere. However, it is very hard to refrain from commenting, not least because so much is at stake.