When the government published its green paper Transforming public procurement at the end of 2020, it hailed the end of the Brexit transition period as “an historic opportunity to overhaul our outdated public procurement regime” and to “design something that delivers for our communities and our businesses”. Since then, the government has outlined its ambitions to introduce a host of changes to its procurement frameworks and its assessment criteria, designed to streamline the process and encourage greater engagement from smaller businesses in particular.
Investors will need to pay close attention to these changes for the opportunities which they present to portfolio companies to secure government contracts, and to understand the government’s priorities to maximise their chances of success.
Some preference for domestic firms – but no golden ticket
The government’s pledge for a new procurement regime that “delivers…for our businesses” might be interpreted as a clear preference to buy from domestic rather than overseas suppliers, but investors should be wary of such a simple interpretation of the government’s agenda. The UK is a signatory to the WTO’s Agreement on Government Procurement (GPA). As such, it is committed to treating suppliers from all GPA countries in the same manner for all procurement processes valued above agreed thresholds.
These thresholds are set at £122,976 for supplies and services, and £4,733,252 for works, meaning that only comparatively low-value contracts may be reserved exclusively for domestic suppliers. Below these thresholds, the government may restrict the procurement by supplier location, which may be UK-wide, or may even be to a county or a London borough. Supplier location is defined with reference to where the supplier is based or established and has substantive business operations and not by location of corporate ownership.
The EU-UK Trade and Cooperation Agreement (TCA) – implemented to establish preferential agreements between the EU and the UK for goods and services – builds on the provisions of the GPA with further commitments for the two parties to offer enhanced access to each other’s procurement markets and to increase the transparency and efficiency of their processes. The terms of the TCA require that the UK and the EU :
- ensure that their procuring entities conduct their procurement processes by electronic means to the widest extent practicable;
- ensure that where procuring entities require a supplier to demonstrate prior experience, they do not require that the supplier has such experience in the territory of the procuring entity;
- ensure that procuring entities can take into account environmental, labour and social considerations in making procurement decisions; and
- ensure that there is an effective domestic review process for dealing with disputes.
- EU and UK suppliers now have access to each other’s procurements in the gas and heat distribution sectors, monopolies, as well as services contracts for hospitality, telecommunications, real estate and education. Contracts for healthcare services and defence are outside the scope of both the GPA and the TCA, so that EU and other GPA suppliers do not have automatic access to UK procurement opportunities in these sectors.
International agreements mean that there has been little change in the in government’s overseas procurement since Brexit
Given the international agreements to which the government is subject, it is perhaps unsurprising that the proportion of UK government procurement spending on overseas suppliers has remained steady since Brexit. As shown below, the overall proportion has been between 13% and 15% every year since 2017. For the IT sector, almost 30% of the UK’s public-sector spending went to overseas suppliers in 2020/21.
Similarly, there is no evidence that the government has displayed a preference for non-EU over EU suppliers since Brexit. Despite government rhetoric about “Global Britain” and the emphasis it has placed on striking new agreements with countries across the world, overseas procurement has continued to be dominated by the EU and the US in the years since the Brexit referendum. According to the procurement database Tussell, the US has been the UK’s biggest supplier in every year since 2017, and six of the top ten spending destinations have been EU Member States.
These trends reflect the deep interdependence between the UK and its traditional overseas suppliers, and these dynamics are unlikely to change over the medium term. As a result, while investors will need to pay close attention to the changing mechanics of the government’s procurement regime in order to ensure that their portfolio companies are well aligned to meet demand, they should not expect a wholesale recalibration of where the government procures goods and services. International suppliers – especially those from the EU and the US – look set to continue to account for around 15% of the UK’s procurement spend, and investors should bear this in mind when assessing international companies looking to engage with the UK public sector as part of their future plans.