Archive: December, 2016

2016 and Brexit

For many, 2016 will be remembered as the year Britain voted to leave the European Union. Since the referendum in June there has been much talk about Brexit but little information on the ways it will effect individuals and organisations. Like any negotiation, however, Brexit won’t take place in isolation and each party has political and economic constraints.

Although we may not be able to say much about the negotiation we can identify the constraints and see how these will affect the outcome with particular reference to procurement professionals.

Laws and regulations

Nearly half of Britain’s exports go to the EU so if Britain wants to go on trading with with EU countries then its exporters will have to keep following their rules.

The UK government announced that they plan to import all existing EU rules into British law via a (misleadingly named) Great Repeal Bill. Any unwanted regulations will be abolished only gradually.

Industries that are heavily reliant on trade with EU nations, such as food, will see little change for some time to come.

Public procurement

Public procurement is worth about £240bn pa or about 20% of GDP. It is governed by the EU procurement rules, for example, all government bodies have to competitive tender any contract worth over €135,000.

Many procurement professionals in the public sector do not like these rules because they ignore key factors such as the size of the organisation’s supplier spend, the category of spend and existing supplier relationships.

It’s reasonable to expect some of these rules will be abandoned and for public procurement to take a more more commercial, less rules based, approach.

Trade tariffs

The move towards populism in Britain has resulted in the Prime Minister, Theresa May, hinting that she will introduce an industrial policy which will favour growth in local markets. A similar approach can be seen in USA. One aspect of the industrial policy will be increasing trade tariffs on certain imported goods and services.

Trade tariffs will raise the cost of imported goods and those goods that comprise a high proportion of imported goods, that is, goods that rely on global supply chains.

Competition

The EU’s Competition Commission has been active in challenging governments wishing to fund large private companies, for example, the French government providing aid to Electricité de France, France Télécom and Alstom. It has also taken on multi-nationals that have tried to exploit a dominant market position such as Microsoft and General Electric.

The EU’s economy is more than 6 times bigger than the UK economy and therefore has a stronger negotiating position. It is reasonable to assume that the UK alone will not be as effective and therefore prices from certain suppliers will increase.

Investment

Brexit has created uncertainty and the lack of transparency from the UK government has compounded the situation. Many organisations will delay investment until the outcome is clearer. This will weaken buyer’s negotiation position in the short run as some of the benefits of economies of scales are missed.

Conclusion

Brexit will have a significant impact on procurement but the impact will be felt in different ways in different parts of the economy.

On the one hand, the price of locally made goods and services will reduce as regulation is loosened and the industrial policy seeks to encourage growth of local suppliers. Furthermore, the public sector will benefit from a more commercial approach.

On the other hand, the price of some goods and services from the EU and USA will rise as the UK government imposes import tariffs and global suppliers take advantage of their dominant position. Both private and public sector organisations will delay or cancel investments whilst uncertainty about Brexit remains.

The final word comes from Carrie Fisher, the actress that died earlier this week: “Everything is negotiable. Whether or not the negotiation is easy is another thing.”