Procurement departments need to plan, and for that, they crave certainty. Since the UK’s referendum vote to leave the European Union (EU), it has been in short supply. Despite politicians asserting that Brexit means Brexit, it could mean nearly anything. Since parliament is sovereign, it could ignore June’s result, which is not legally binding. Or the government could take the plebiscite as a mandate to rid the UK of EU law or trading agreements, including withdrawal from the free market and customs union.
But during the October conference of the ruling Conservative Party, a few pieces of the Brexit puzzle began to fall into place.
UK Prime Minister Theresa May said she would invoke Article 50 of the Treaty on the Functioning of the EU, which is the official mechanism for leaving the union, before the end of March 2017. This will begin two years’ of negotiations to determine the terms under which the UK will leave, but not its future relationship with the EU, which will be negotiated separately.
Even after two years, little will change dramatically, as May has also said the government would effectively convert all EU law into UK law as part of what has become known as the ‘Great Repeal Bill’.
Totis Kotsonis, a completion lawyer and partner at Eversheds, the international law firm, says: “After Brexit, the body of existing EU law will continue to be binding in the UK as purely domestic legislation. In other words, the intention is that there is some form of continuity so that the day after Brexit essentially the same laws would apply as before Brexit. However, it would be for the UK Courts, rather than the EU Courts, for example, to determine how this body of law should be interpreted.
Over time, the UK government can then decide whether to amend or repeal specific legislation, depending on its priorities and negotiated relationship with the EU.
Even EU public sector procurement rules will be unlikely to change in substance, Kotsonis says.
Public procurement legislation is often described as too complex by its critics. The existing rules implement in the UK, EU legislation which is, in fact, partly designed to comply with the World Trade Organisation’s plurilateral Agreement on Government Procurement (GPA). Signatories to the GPA include the US, Canada, Israel, Hong Kong, South Korea and Japan. Tellingly, China is also set to become part of this group. Expectations are that the UK government would wish to ensure that the UK continues to comply with GPA arrangements as it would not want to see UK businesses forego opportunities in these markets.
However, the long-term implications for trade and free movement of labour between the UK and the EU are more difficult to anticipate, Kotsonis says. “What will change? This is far from clear at this stage. Certainly, the Prime Minister has indicated that the UK wishes to have control over its immigration policy. What effect this might have on the ability of EU nationals to work in the UK or the ability of British companies to trade freely with and operate in the Single Market, are issues which will be decided during the negotiations.”
Procurement leaders need to pay attention to negotiations as they unfold to see how they may have to adjust sourcing of goods and services, as well as workforce planning via labour supply agencies which commonly recruit from the EU.
“Long term, procurement needs to have certainty over issues such as freedom of movement in people and the supply of goods. The government is aware of these type of concerns expressed by the business community. However, ultimately, these issues will not be settled until after the conclusion of negotiations for a new relationship with the EU,” Kotsonis says.
As the messages from ruling politicians suggest the UK is edging towards Hard Brexit, which many believe would entail the UK leaving the Single Market completely, UK industries are raising concern over the impact on supply chains. For example, engineering employers’ organisation, the EEF, points out that it is regulation, rather than trade tariffs, that could become more important in determining the future shape of supply chains crisscrossing the UK/EU border.
“Manufacturers in the UK are often part of complex global and European supply chains. One of the main concerns would be any increase in cost and administrative burden for manufacturers. It will be important to consider what impact changes to Rules of Origin would have for manufacturers in these complex supply chains. These factors, and others, could risk an increase in the cost of doing business with our biggest market, the EU, and could have a significant impact on UK manufacturing supply chains, potentially causing re-structuring of supply chains outside of the UK,” it said in a recent paper.
Kevin Doran, Accenture, practice lead, sourcing and procurement, Europe, Latin America and the Middle East says that while the long-term picture remains uncertain, procurement departments can take steps to mitigate risks in the short term.
“You should focus on business as usual, and beating the competition. Beyond that, there are ways of creating some certainty out of uncertainty. We know the broad range of options in terms of tariff and regulatory impact. Work down the profit and loss account and decide where you are most impacted. Create certainly by modelling the effect of the most likely scenarios,” he says.
Despite the prospects of trade tariffs with EU member states, currency exchange rates give greater cause for concern in the short term, Doran says. In early October, the British Pound hit a 31-year low against the US dollar.
“In around 1991, tariffs were major levers on cost and may have caused you to move your supply chain. But now the worst case is moving to the World Trade Organisation tariffs which are tiny, between 3.8% and 4.8% for industrial products, in comparison to fluctuations in currency. Moving to WTO tariffs would not be the seismic event some people talk about.”
Buyers can look to mitigate currency fluctuation by hedging with financial instruments, or holding more stock at the right time, he says.
While procurement professionals cannot be certain what Brexit will entail, in detail, they can start to prepare. As well as protecting the business, it could benefit procurement’s standing with senior management.
This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.