Evidence on Brexit impact on UK-EU trade in services submitted to the House of Lords' Sub-Committee on EU Internal Market

The UK House of Lords' Sub-Committee on EU Internal Market has now published the evidence I submitted to their inquiry Brexit: future trade between the UK and EU in services. Here is the full text (also available in pdf here), which includes some scenarios excluded by yesterday's Theresa May's Brexit Speech (see my thoughts here). Comments would be most welcome, particularly in view of future work related to the Great Repeal Bill and other Brexit-related changes to public procurement regulation in the UK.

Executive Summary

  1. Bilateral UK-EU procurement-related trade can be estimated at around 15% of the total value of procurement, or close to 2.5% of GDP. This includes both direct and indirect cross-border procurement-related trade. The magnitude is larger if access to WTO GPA markets is considered.
  2. The UK’s exposure to public procurement-related trade in services in the EU is particularly relevant; the UK alone accounts for 84 % of the total value procured at EU level in awards of more than 100 million euros (approx. £85 mn).
  3. Losing the possibility of this cross-border trade would clearly be detrimental to the UK public sector, which would be at risk of not obtaining top quality services and/or facing increased prices from reduced competition amongst domestic suppliers. UK businesses would also be negatively affected if they lost the option of direct and indirect trade in services to the EU.
  4. The EU has developed a sophisticated acquis of public procurement rules, which the UK has successfully shaped in successive rounds of negotiations, most recently in the 2011-2014 period leading to the approval of the current EU rules.
  5. The UK has adopted a copy-out approach to the transposition of the EU rules, which ensures that UK businesses only need to know one regulatory regime in order to be able to sell to the public sector both in the UK and in the rest of the European Union.
  6. EU public procurement law ensures that UK businesses have full access to the public sector markets of all other EU Member States, and that EU businesses have full access to the UK public sector markets. This ensures free trade in services in the context of public procurement under conditions of transparency, equal treatment and non-discrimination.
  7. These advantages would be limited or lost if the UK were to lose access to the EU internal market. The extent of that restriction or loss of free public procurement-related trade in services would depend on the future relationship between the UK and the EU, as well as its impact on the UK’s status under the WTO Government Procurement Agreement (GPA).
  8. EEA membership would require full compliance with the EU public procurement acquis and would entail no changes in access to EU and GPA procurement markets.
  9. A tailor-made Free Trade Agreement (FTA) like the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA), would also require full compliance with the EU public procurement acquis. Access to GPA procurement markets would depend on the UK’s status under WTO GPA.
  10. 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. 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. The main risk implicit in this option would concern the continuity 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 current access to those markets.
  11. If the UK sought to reach a solution similar to CETA, it may also be at risk of having to provide more stringent access commitments to the EU than currently. This has been the case of CETA, which is based on the WTO GPA mechanism, and where only Canada made additional coverage concessions to the benefit of EU (including UK) businesses.
  12. ‘Hard Brexit’, ie no trade agreement of any kind combined with loss of WTO GPA membership, would imply loss of access to EU and worldwide procurement markets, for services but also for goods and works. 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.

Submission

The purpose of this document is to provide the House of Lords EU Internal Market Sub-Committee with evidence of the contribution that the EU public procurement rules make to the facilitation of trade in services between the UK and the rest of the EU. It also aims to highlight the barriers to trade that could arise post-Brexit—which are however contingent on the legal configuration of the future relationship between the UK and the EU and, notably, on the level of access to the internal market.

1. Economic Relevance of Procurement-Related Trade in Services

1.1. Trade in services is facilitated by the EU public procurement rules (described below 2.). Establishing the magnitude of procurement-related trade in services is difficult due to a lack of reliable data and because services can be exported/imported, but they are also susceptible of “localised” provision through the establishment of subsidiaries in other Member States. A UK business wishing to provide services to the public sector in other Member States may thus decide to provide them directly from the UK, or rather to establish a subsidiary, branch or other organisational unit in those Member States. The same applies to EU businesses seeking to provide services to the UK public sector. Both options are direct benefits of access to the EU’s internal market. Therefore, the economic dimension of direct trade in services through imports/exports and indirect trade in services through the exercise of freedom of establishment needs to be jointly taken into account.

1.2. In a recent research briefing,[1] the House of Commons Library (HoCL) indicated that

… the extent of direct cross-border public procurement is limited. An estimated 1.3% of the value of larger UK public sector contracts was awarded directly abroad in 2009-2011. Some 0.8% of the value of larger public contracts secured by UK companies was directly from abroad.

However, this misrepresents the economic importance of cross-border public procurement between the UK and the rest of the EU by suggesting that it only affects between 0.8% and 1.3% of large value procurement contracts. The HoCL research briefing does not mention indirect cross border effects derived from the establishment of EU suppliers in the UK, and UK suppliers in other EU Member States, who then sell from their respective “localised” subsidiaries (for instance, Siemens UK would qualify as a domestic supplier for the purposes of direct cross border tenders, while most people would agree that the Siemens group is German for industrial policy purposes).

1.3. The European Commission published data in 2011 that estimated indirect cross-border procurement to be much closer to 25% in value at EU level.[2] The disaggregated data for the UK showed that the actual economic relevance of cross-border public procurement is around 16.5% of the value of large UK public sector contracts (13.8% by number of contracts). The EU has an average penetration of direct and indirect cross-border procurement of 16.9% by value of contracts (and 13% by number of contracts). Given that procurement expenditure represents around 16% of GDP,[3] bilateral UK-EU procurement-related trade can be estimated at around 15% of the total value of procurement, or close to 2.5% of GDP.

1.4. Similar data for the economic relevance of public procurement-related trade in services under the World Trade Organisation Government Procurement Agreement (WTO GPA; see 2.2. below) is difficult to compile.[4] In any case, bearing in mind that the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition to suppliers from GPA parties offering goods, services or construction services, and by simple logic, it is plain to see that the magnitude in GDP terms of public procurement-related trade in services is even larger if access to WTO GPA markets is considered.

1.5. The UK’s exposure to public procurement-related trade in services within the EU is particularly relevant in the UK. As stressed by the European Commission in a recent report using 2014 data,[5] 

The concentration of procurement in large notices is outstanding in the UK, particularly in the procurement of services, where the UK alone accounts for 84 % of the total value procured at EU level in awards of more than 100 million euros [(approx. £85 mn)].

1.6. Losing the possibility of this cross-border trade would clearly be detrimental to the UK public sector, which would be at risk of not obtaining top quality services and/or facing increased prices from reduced competition by domestic suppliers. UK businesses would also be negatively affected if they had difficulties engaging in direct and indirect exports of services to the EU.

2. EU Law Facilitating Procurement-Related Trade in Services

2.1. On the basis of the rules on the free movement of goods and services in the Treaty on the Functioning of the European Union, the EU has accumulated a well-developed public procurement acquis, which currently comprises the following instruments:

  • Directive 2014/23/EU on concession contracts[6]
  • Directive 2014/24/EU on public procurement[7]
  • Directive 2014/25/EU on utilities procurement[8]
  • Directive 2009/81/EC on defence and security procurement[9]
  • Remedies Directives, as amended by Directive 2007/66/EC[10]

2.2. The EU public procurement acquis is coordinated with the EU’s international obligations under the World Trade Organisation Government Procurement Agreement (WTO GPA),[11] and compliance with EU law allows its Member States, including the UK, to benefit from the advantages of that international instrument of procurement liberalisation. Therefore, through compliance with the EU public procurement acquis, the UK (both its public sector and its business community) benefit from access to the EU internal market and to the public procurement markets of WTO GPA signatories.[12]

2.3. The UK has been a key player in shaping these rules, most notably in the period between 2011-2014, which lead the adoption of the 2014 Public Procurement Package (ie Directives 2014/23, 2014/24 and 2014/25), with Cabinet Office clearly stressing that the “revised [EU] package represents an excellent overall outcome for the UK, with progress achieved on all of our priority objectives”.[13]

2.4. These EU rules have been transposed in the UK following a copy-out approach. In England and Wales, the transposition has most notably resulted in the Public Contracts Regulations 2015, as amended by the Public Procurement (Amendments, Repeals and Revocations) Regulations 2016. Similar rules have been adopted by the devolved administrations with public procurement powers.[14] Even if there is a perception that EU law (as transposed) imposes significant constraints on the development of effective or efficient procurement in the UK, this perception is unsubstantiated.[15]

2.5. There are numerous other EU law instruments that facilitate procurement-related cross-border trade in services, such as the Services Directive (2006/123/EC),[16] or technical rules establishing the Common Procurement Vocabulary (CPV).[17] This is also facilitated by EU rules on technical standardisation more generally. Even if this may seem more relevant for procurement-related trade in goods, it is still relevant for services in terms of eg general quality assurance systems.

2.6. The rules in the statutory EU public procurement acquis are complemented by a large body of case law of the Court of Justice of the European Union, which has been deciding an average of over 30 public procurement cases per year in recent years.[18] The CJEU case law has extended the general principles of equal treatment and non-discrimination beyond the strict scope of application of the EU public procurement Directives, thus expanding the scope of the EU’s internal market for public procurement.

2.7. Taken as a whole, EU public procurement law, including the case law of the Court of Justice, ensures that UK businesses have full access to the public sector markets of all other EU Member States, and that EU businesses have full access to the UK public sector markets. This ensures free trade in services in the context of public procurement under conditions of transparency, equal treatment and non-discrimination. No tariff or non-tariff measures are allowed.

2.8. Additionally, for UK businesses, given the copy-out approach adopted by the Government for the transposition of the 2014 EU rules, this effectively means that knowledge of a single set of rules—ie the Public Contracts Regulations 2015, which replicate Directive 2014/24/EU[19]—allows them to bid for services contracts in other EU jurisdictions with minimal additional requirements, other than those related to language and the specific constraints of each tender. This has, for instance, clearly supported the creation of a true single public procurement market in the island of Ireland, with strong levels of penetration of Northern Irish exports to the Republic of Ireland estimated at around 58%.

2.9. These advantages would be limited or lost if the UK were to lose access to the EU internal market post-Brexit. The extent of that restriction or loss of free public procurement-related trade in services would depend on the future relationship between the UK and the EU.

3. Alternative UK-EU Relationships and Implications for Trade in Procurement-Related Services

3.1. If the vote to leave the EU in the referendum held on 23 June 2016 leads to the UK withdrawing from the EU, a number of scenarios emerge for the future relationship between the UK and the rest of the EU. Each of these scenarios would have different implications in terms of public procurement-related trade in services.[20]

3.2. If the UK were to retain access to the internal market as a member of the European Economic Area (EEA), there would be no significant substantive changes and business would continue largely as usual. EEA Member States need to comply with the EU public procurement acquis, as all EU public procurement directives are declared texts with EEA relevance. Compliance is supervised by the EFTA Surveillance Authority rather than the European Commission, but both entities work closely in their enforcement efforts. Cases can be brought to the EFTA Court rather than the Court of Justice of the European Union, but the EFTA Court needs to ensure harmonious interpretation of EU and EEA law and, consequently, relies on CJEU case law. In this case, the UK would retain access to EU and GPA procurement markets.

3.3. If the UK were to seek access to the EU’s internal market through a tailor-made Free Trade Agreement (FTA) with the EU, it is also very likely that the EU would insist on the retention of UK public procurement law as is as the continued substantive coordination of EU and UK rules. This is clear, for instance, in the recent EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA),[21] which Chapter 8 on public procurement requires that

Ukraine will, over several years, adopt current and future EU legislation on public procurement. With the exception of defence procurement, Ukrainian suppliers and service providers will have full access to EU public procurement markets, and EU suppliers and service providers will have the same to the Ukrainian procurement market.

If the UK wanted to retain access to defence procurement (including services), it would need to also include continued compliance with Directive 2009/81 in its tailor-made FTA with the EU. Moreover, entering into a tailor-made FTA with the EU would not ensure access to GPA procurement markets, which would depend on the status under the WTO GPA (see immediately below 3.4.).

3.4. If the UK sought to exclusively rely on WTO GPA membership, there would be difficult legal issues to resolve. First, it would be necessary to determine whether the UK is a party to the WTO GPA in its own right or if its membership derives from its being part of the EU. If the latter, the UK would have to negotiate fresh accession to the WTO GPA, which would imply loss of access to GPA markets in that intervening period. Second, and regardless of continued or new membership, it would be necessary to determine the scope of coverage of the UK’s commitments towards the remaining parties of the GPA, and vice versa. Given the UK’s bargaining position as a sub-part of the EU, it is not out of the question that the UK would be under pressure to accept more stringent commitments to open up its procurement markets to GPA parties than it currently has to do under the scope of coverage negotiated by the EU as a whole. This could trigger protracted negotiations, also negatively impacting on access to GPA procurement markets. Finally, it would be necessary for the WTO GPA parties to accept that the UK’s domestic procurement system meets the relevant requirements. The easiest way of doing so would be to retain the current rules because, as indicated above (2.2.), they are already coordinated with the WTO GPA.

If the UK managed to secure continued or fresh membership of the WTO GPA, and unless it managed to persuade the rest of the WTO GPA parties to alter the current schedules of coverage in a manner that benefitted the UK on balance—which is by no means a given—and to accept its departure from the EU public procurement acquis, it is also likely that there would be scope for relatively minor technical adjustments to UK public procurement law and to the international openness of the UK public procurement markets. Thus, there is not much to be gained in this scenario and the main risk implicit in a future UK-EU relationship based on WTO GPA rules only would concern the continuity of access to the procurement markets of GPA parties (including the EU), as well as the risk of having to make additional coverage concessions in order to retain access to those markets in the present terms.

3.5. This would also apply if the UK were to aim for reciprocal commitments with the EU beyond the WTO GPA but on the basis of the WTO GPA mechanism, as recently achieved by Canada in the EU-Canada Comprehensive Economic and Trade Agreement (CETA).[22] In fact, in CETA, only Canada made additional coverage concessions to the benefit of EU (including UK) businesses, as access to EU public procurement markets for Canadian undertakings was already provided in practice.[23]

3.6. Finally, a scenario of ‘hard Brexit’ ie no trade agreement of any kind, combined with the loss of WTO GPA membership—which can be considered more likely in this scenario due to the EU’s foreseeable unwillingness to recognise the UK’s continued membership (see above 3.4.)—would imply loss of access to EU and worldwide procurement markets, for services but also for goods and works. 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 in services.

4. Final Remarks

Short of ensuring full access to the EU internal market and GPA procurement markets, Brexit will have a negative effect on future public procurement-related trade in services between the UK and EU, as well as between the UK and the rest of GPA signatory parties.

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[1] Commons Briefing papers CBP-7213, Brexit: impact across policy areas, 26 August 2016, available at http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7213.

[2] See Final report on cross-border procurement above EU thresholds, prepared by Ramboll and HTW Chur for the European Commission, DG Internal Market and Services, March 2011, pp. 36-41, available at http://ec.europa.eu/internal_market/publicprocurement/docs/modernising_rules/cross-border-procurement_en.pdf.

[3] European Commission, DG TRADE, Public Procurement in a nutshell, available at http://ec.europa.eu/trade/policy/accessing-markets/public-procurement/index_en.htm.

[4] For statistical information, see https://www.wto.org/english/tratop_e/gproc_e/gpstat_e.htm.

[5] DG GROW G4 - Innovative and e-Procurement, Public Procurement Indicators 2014, 2 February 2016, p. 2, available at http://ec.europa.eu/DocsRoom/documents/15421/attachments/1/translations/en/renditions/pdf.

[6] OJ L 94, 28.3.2014, p. 1–64. See also Commission Delegated Regulation (EU) 2015/2172 of 24 November 2015 amending Directive 2014/23/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 9–10.

[7] OJ L 94, 28.3.2014, p. 65–242. Commission Delegated Regulation (EU) 2015/2170 of 24 November 2015 amending Directive 2014/24/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 5–6.

[8] OJ L 94, 28.3.2014, p. 243–374. See also Commission Delegated Regulation (EU) 2015/2171 of 24 November 2015 amending Directive 2014/25/EU in respect of the application thresholds for the procedures for the award of contracts, OJ L 307, 25.11.2015, p. 7–8.

[9] OJ L 216, 20.8.2009, p. 76–136. See also Commission Regulation (EU) 2015/2340 of 15 December 2015 amending Directive 2009/81/EC in respect of the application thresholds for the procedures for the award of contracts, OJ L 330, 16.12.2015, p. 14–15.

[10] OJ L 335, 20.12.2007, p. 31–46. Non-official consolidated versions of the General Remedies Directive (89/665/EEC) and the Utilities Remedies Directive (92/13/EEC) are respectively available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1989L0665:20080109:en:PDF and http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1992L0013:20080109:en:PDF. It is worth noting that the European Commission is currently assessing the need for their further revision.

[11] See https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm.

[12] A full updated list is available at https://www.wto.org/english/tratop_e/gproc_e/memobs_e.htm.

[13] Procurement Policy Note 05/13 – Further progress update on the Modernisation of the EU Procurement Rules, 25 July 2013, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225398/PPN_-_outcome_of_negotiations.pdf.

[14] See eg the Public Contracts (Scotland) Regulations 2015.

[15] For details, see http://www.howtocrackanut.com/blog/2016/11/30/brexit-and-public-procurement-some-thoughts-after-kcl-seminar.

[16] OJ L 376, 27.12.2006, p. 36–68.

[17] Commission Regulation (EC) No 213/2008 of 28 November 2007 amending Regulation (EC) No 2195/2002 on the Common Procurement Vocabulary (CPV), OJ L 74, 15.3.2008, p. 1–375.

[18] For more details on the calculations and decisional trends, see my analysis of the CJEU’s 2015 annual report at http://www.howtocrackanut.com/blog/2016/8/24/a-second-look-at-the-cjeus-public-procurement-activity-2006-2015.

[19] For detailed assessment, see the web commentary I co-authored with Dr Pedro Telles (Swansea), which is freely available at www.pcr2015.uk.

[20] For analysis, amongst others, see the opinions of Michael Bowsher QC (http://publicsectorblog.practicallaw.com/procurement-law-after-brexit/), Global Counsel (https://www.global-counsel.co.uk/sites/default/files/special-reports/downloads/Global%20Counsel_Impact_of_Brexit.pdf) or Professor Sue Arrowsmith (https://www.achilles.com/images/locale/en-EN/buyer/pdf/UK/sue-arrowsmith-brexit-whitepaper.pdf).

[21] http://trade.ec.europa.eu/doclib/docs/2013/april/tradoc_150981.pdf.

[22] See http://ec.europa.eu/trade/policy/in-focus/ceta/index_en.htm.

[23] European Commission, DG TRADE, CETA – Summary of the final negotiating results, p. 12, available at http://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf.