The Effects of Brexit on Procurement
Tomorrow Theresa May will trigger Article 50 and start the process of Britain leaving the European Union.
Procurement specialist Angus Craig discusses the questions being asked by procurement professionals around Brexit, and the factors that will influence the answers.
“There are three key questions procurement professionals are asking: will Article 50 lead suppliers to request price increases, are these increases justified, and is there an alternative?
Like any negotiation, Brexit won’t take place in isolation. Each party, in this case the UK and EU, face political and economic constraints. By examining these constraints we can start to provide some answers:
Brexit has caused economic uncertainty and consequently the pound has fallen by over 10% against the euro and dollar since June 2016. Triggering Article 50 will do nothing to alleviate this uncertainty, therefore the pound is likely to remain under pressure. While the pound remains low the price of imported goods and services will be high. For many buyers it is too late to hedge against the weak pound; where possible buyers may consider switching sourcing to the UK.
The weak pound is also driving higher inflation: in June 2016 the retail price index (RPI) was 1.6%, in February 2017 it had risen to 3.2%. Many suppliers will see this as an opportunity to raise prices, although only those whose products are affected by the value of the pound will have reasonable justification.
The move towards populism in Britain has resulted in Theresa May publishing the green paper Building our Industrial Strategy, which states that the UK government will favour growth in local markets (a similar approach has been seen in the US with Donald Trump’s policy of America First).
The industrial policy will help some UK suppliers, in particular those industries in which Britain already prospers, such as the creative industries and life sciences, and align with others that are predicted to grow in the future, for example low-emission vehicles and robotics. It will however take some time before buyers see the effects of the industrial policy in supplier’s pricing.
Another aspect of the industrial policy will be the increase of trade tariffs on imported goods and services. May has also promised new trade agreements, although little is known about which countries will be included and how tariffs will be affected.
Increasing trade tariffs will compound the effect of exchange rates on some goods and services. Items that are imported and those that comprise a high proportion that are imported (goods that rely on global supply chains) will see prices increase as suppliers pass on the cost of the tariffs. Where possible, buyers may switch to sourcing to the UK.
Laws and regulations
Many procurement professionals anticipate that leaving the EU will result in a reduction in regulations, and that this will enable suppliers to produce goods and services at lower cost which will be passed on to customers in lower prices. This may be the case for some goods and services but it will take time before buyers see the effects. Tomorrow’s triggering of Article 50 marks the start of a long negotiation process, and buyers will see little change in the short and medium term.
Currently nearly half of Britain’s exports go to the EU, therefore if Britain plans to continue trade with EU countries, its exporters must continue to follow their rules. Through the process of ‘flow-down’ buyers will include elements of EU regulations in specifications. The UK government intends to import all existing EU rules into British law via a (misleadingly named) Great Repeal Bill, after which unwanted regulations will be gradually abolished. Due to the slow nature of this process, industries that are heavily reliant on trade with EU nations, such as food, will see little change for the foreseeable future.
Public procurement is worth approx. £240bn pa or 20% of GDP. It is governed by the EU procurement rules, under which all government bodies must competitively tender any contract worth over €135,000. Many procurement professionals in the public sector do not favour these rules as they ignore key factors such as the size of the organisation’s supplier spend, the category of spend, and existing supplier relationships. It is reasonable to expect a number these rules to be abandoned and for public procurement to take a more commercial, less rules based, approach.
The EU’s Competition Commission has been challenging governments who wish 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.
With an economy that is over six times bigger than the UK economy, the EU is in a much stronger negotiating position; it is reasonable therefore to assume that the UK alone will not be as effective and prices from certain dominant 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, which will weaken buyer’s negotiation position in the short run.
Brexit is already having an impact on procurement through the weak pound, and the triggering of Article 50 will have an impact that will be felt in different ways across the economy.
On the one hand, the price of certain locally made goods and services will reduce in the long term as regulation is loosened and the industrial policy encourages growth of local suppliers. Furthermore, the public sector will benefit from a more commercial approach.
On the other hand, the price of certain goods and services from the EU 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.”
Angus Craig is Director at Craig Hall Consulting Ltd, supporting procurement transformation and tactical cost reduction for organisations that have acquired or merged with other organisations.