HM Insights

The Shetland blog: Brexit & businesses vying for public sector contracts

Every Shetland-based business will be affected in some way by Brexit – whether this is through general changes to economic and trading conditions or by the eventual repeal of specific laws.

For local businesses which currently trade across borders, there has already been a significant change brought about by the sudden decline in the value of sterling. This is obviously good news for those exporting, but we have also heard dismay from some local companies dependent on imports from the continent, who are now looking anxiously at their contractual terms regarding pricing and minimum purchase obligations.

As regular contributors to procurement, exporting and internationalisation events, we are very aware that international opportunities are two-way.

Even for those local export businesses currently benefitting from the pound's fall, it is apparent that this generally offers minimal comfort compared to the possibility of loss of access to the single market. What eventual access is secured (and by whom) will have a huge impact on exporting businesses (as well as knock-on effects for absolutely everyone).

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What could it mean for public contracts?

For those businesses looking for a silver lining, many appear hopeful that Brexit would lead to the abolition of the public procurement rules (which are derived directly from EU law). These rules, which require public bodies to open up opportunities to suppliers across the EU, are often unpopular with small and medium-sized enterprises, some of whom consider that public bodies in a particular area should be able to award contracts directly to "local" businesses, and some of whom are frustrated with the complexity of the procedures imposed.

Unfortunately for them, we don't think that Brexit will lead to any immediate reform. Any agreement reached with the EU may require Scottish public bodies to continue to adhere to EU procurement rules and, even if it does not, World Trade Organisation rules would require some form of competitive procurement.

Public bodies also have a "best value" obligation and procurement exercises are an effective way of demonstrating this. Holyrood, and to a lesser extent Westminster, have imposed procurement obligations beyond those required by EU law, for example for social or environmental reasons. There is no indication that they would wish to reverse this position.

Still, procurement activity will undoubtedly be affected by Brexit. To a limited extent, we are seeing this already – we have heard of some businesses increasing their tender prices simply to take account of Brexit uncertainty. Going forward, suppliers from other countries may not wish, or may not be commercially able, to continue to operate in the UK at all.

Tender prices could potentially increase if there is a lack of low-cost labour (depending on what happens to immigration levels) or they could decrease if there is significant change to employment legislation – in particular, if the EU-derived TUPE rules are repealed or significantly amended, this could lead to a reduction in the prices at which suppliers are willing to bid.

The procurement rules are a fundamental part of the EU single market. Other competition law rules will also be amended as a result of Brexit – in particular, changes to the EU state aid rules (which prevent public bodies favouring particular businesses) could have a potentially significant effect on businesses in the UK, including in the islands where we have recently seen several proposed interventions by public bodies being cancelled or significantly re-shaped in order to comply with these rules.