Procurement Leaders

What does Brexit mean for procurement?

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As The UK votes to leave the European Union two experts share their thoughts on what it might mean for procurement

 

Phil Thornton, lead consultant, Clarity Economics

 

If there was any doubt about the potential economic impact of a vote by UK citizens to withdraw from the European Union, the fact the pound tumbled after Boris Johnson, the mayor of London, said he was backing a “Brexit” was surely proof enough.


Just hours after the mayor’s impromptu press conference outside his London home in late-February, the value of sterling had decreased by almost 2% against the dollar, before falling to around $1.39 by the end of the month.


Within just seven days, the price of dollar based commodities had increased by more than 3.5% for British importers – and polling day was still almost four months away.


Exchange rates will clearly respond the quickest to the news of the referendum vote. Financial services firm HSBC had said a vote to remain could send the pound to $1.60 against the dollar, an increase of around 15%.


But it also warned that a vote to leave could trigger a 15% to 20% fall while the pound could plunge almost 30% to reach parity against the euro from current levels of around €1.29.


This is a nightmarish prospect for procurement executives. Companies can hedge against possible moves in currencies, but not when exchange rates could move 15% either way in a matter of minutes.


There will also be more long-term effects for procurement if the UK decides to leave the EU.


The European single market has reduced or eliminated barriers for trade in goods and services – whether they be raw materials, semi-components or finished goods.


Figures from the German central bank the Bundesbank, point to a key lesson from history. In the 15 years between 1958, when the European Economic Community was formed, and 1973, when the UK joined, the country’s share of the West Germany import market fell from more than 16% to less than 8%. Within seven years of joining, that share had recovered to 18%. Allan Monks, an economist at JP Morgan, notes the impact of an exit on the UK economy will be determined largely by whatever relationship the UK manages to forge with the EU, which may not become clear for a number of years.


Europe will remain the nation’s largest trading partner, even if the UK leaves the EU.

 

British companies will want to continue to buy and sell into the EU and vice versa, but the ease with
which they can trade will depend on the sort of trading relationship they build.


At one end of the spectrum, the UK could drive a hard bargain, one that would secure increased sovereignty, but would have a negative effect on growth.


At the other end, securing full access to the single market could reduce adverse economic consequences, but it would involve signing up to many EU regulations that are currently
in place – similar to the agreements struck by Switzerland and Norway.


As Douglas Renwick, a senior director for sovereigns at Fitch Ratings, put it in a report: “The terms of any trade agreement would be critical to the potential impact on corporates operating in the UK.


“We would not expect corporates to relocate existing operations during the negotiation period, but if favourable trade terms were not reached, this would be a longer-term risk.”


An exit could also create new competition authorities and regulators in sectors such as telecoms, creating problems if there were a divergence between UK and EU-wide regulation, or the approaches taken by antitrust authorities. Retailers could face increased import costs from either currency depreciation or more significant trade barriers.


But companies based in continental Europe, with few links to the UK, cannot rest easy. A slowdown in UK growth – many analysts put the impact at 1% to 1.5% – would adversely affect the EU. This could cause a vicious cycle that would worsen conditions on both sides of the Channel.


More significant is the implication that EU membership is not irrevocable. If Brexit sparks nationalistic sentiments and further splits within Europe, then companies will find their trans-European procurement arrangements more difficult to manage.

 

Panos Koutrakos, Professor of European Union law, City University London

 

The extent to which UK firms would have access to the procurement market in EU member states will depend on the nature of the arrangement that the UK and the EU would reach pursuant to Article 50 of the Treaty on Europea Union. If, for instance, the UK was to become a member of the European Economic Area, it would still be bound by EU procurement legislation. In fact, the only change for the UK would amount to losing any influence on shaping the content of the rules with which it would have to comply.


On the other hand, if a different arrangement were to be reached, the scope of access to tendering opportunities in the UK and EU markets would be part of the overall policy package that the two parties would negotiate.


There is another layer of uncertainty that would ensue post-Brexit. Under existing rules, there are procurement provisions in a number of international treaties that the EU concludes with third countries. These are binding on all member states and grant rights to EU businesses as a matter of law.


A case in point is the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, which has attracted considerable publicity in the last couple of months. When it comes into force, CETA will grant EU firms access to the public procurement of federal, provincial and municipal authorities, with certain exceptions, in Canada.


Other international treaties with provisions on public procurement that the EU has negotiated, include
trade agreements with Mexico, Chile, Colombia, Peru, Central America, South Korea, Vietnam, and Singapore.


Such agreements would not be immediately applicable to the UK if it were to leave the EU.


Opportunities for UK firms to access those markets would be disrupted and would become contingent on the bilateral treaties that the UK would negotiate itself. The negotiating process will be long, difficult and expensive and would raise a host of legal and practical problems.

 

There are two points worth making here.


First, the UK has not negotiated international trade agreements for more than 40 years, as the competence to conclude such treaties has long been conferred on the EU. Second, as a matter of international treaty-making policy, there is an increasing tendency for big package deals.


Such deals require big markets to support them.

 

In the absence of a new bilateral treaty between the UK and a third country, World Trade Organization law would not automatically be helpful to business. On the one hand, the General Agreement on Tariffs and Trade does not apply to public procurement.


On the other, the Government Procurement Agreement (GPA) only guarantees access to procurement markets of its participating parties. These do not include the UK, which would, then, need to negotiate its accession.


It follows that the procurement opportunities for the UK business post-Brexit would be subject to considerable uncertainty.

 

This state of affairs would affect not only access to the EU market but also access to third-world countries.

 

To read more about our analysis of Brexit click here.

 

This contributed article has been written by an experianced journalist and a guest author at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content

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