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Brexit – State aid and public procurement law update

  • United Kingdom
  • Brexit
  • Competition, EU and Trade - Brexit
  • Public procurement
  • State aid


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Introduction – Where are we now?

In our original June 2016 briefing on the possible effects of Brexit on public procurement and State aid legislation we set out a number of possible post-Brexit scenarios, concluding that the extent to which the UK’s exit from the EU would affect procurement and State aid legislation ultimately depended on whether the UK would maintain access to the Single Market, or indeed parts of the Single Market.

Since then, there have been a number of Government statements and comments which clarify further the likely effects of Brexit on current EU law obligations, including as regards State aid and public procurement. Key amongst these, was the Prime Minister’s speech on 17 January 2017 clarifying that the UK was not seeking to remain a member of the Single Market after Brexit. Instead, it would be seeking a ““comprehensive free-trade agreement” that should allow for the “freest possible trade in goods and services between Britain and the EU’s member states”. In the same speech, the Prime Minister repeated a pledge first made on 5 October 2016: the introduction of a “Great Repeal Bill”. This will repeal the European Communities Act 1972 (ECA), which is the legislation that gives EU law direct effect in the UK, and convert the body of existing EU law (including case law) into domestic legislation.

In other words, the intention is that there should be some form of continuity so that, as far as possible, from the first day of Brexit the same laws apply in the country as prior to the UK’s exit from the EU. However, it would be for the UK Courts, rather than the Court of Justice of the EU, for example, to determine how this body of “domesticated” law should be interpreted. Over time, the UK Government can then decide whether to amend or repeal specific legislation, depending on priorities, its new relationship with the EU and other international commitments.

Given the Government’s clear position that the UK would be seeking to “take back control" of its laws and “bring an end to the jurisdiction of the European Court of Justice in Britain”, it would seem increasingly unlikely that a future UK-EU deal will provide for the direct application of EU law in the UK. This might mean that in reality, the two most likely post-Brexit scenarios would be that:

(a) the UK would no longer need to apply EU laws so that, following the implementation of the Great Repeal Bill, the Parliament would consider whether to keep, repeal or amend the EU legislation that would have been converted into UK law; or
(b) as part of a comprehensive free trade agreement, the UK would be required to implement domestically laws which (at least in certain areas) continue to be consistent with EU legislation.

As regards State aid and public procurement specifically, Government officials, including the Prime Minister and the Chancellor of the Exchequer, have made a number of statements which strongly suggest that even in circumstances where a future relationship with the EU does not require the UK to continue to comply with EU State aid and procurement rules, or indeed, does not require the UK to apply substantively similar legislation domestically, it is the Government’s intention that some form of State aid and procurement regulation should continue.

Indeed, in those circumstances, it seems that while the Government would want to consider the extent to which it would be possible and desirable to set up more flexible State aid and procurement regulatory regimes, post-Brexit, it is not the Government’s intention to do away with State aid and procurement regulation altogether. For example, according to the Prime Minister, post-Brexit, the Government will not be “propping up failing industries or picking winners”, while according to the Chancellor of the Exchequer, the Government will not “create a situation where UK Government procurement is buying uncompetitively expensive products”1.

What might that mean in practice for State aid and public procurement?

As discussed in more detail below, as far as State aid is concerned, there would be a number of challenges in seeking to incorporate into domestic legislation the body of EU State aid law. At the same time, in circumstances where EU State aid rules are no longer directly applicable in the UK, it remains a real possibility that the UK would choose, or be required to, implement a domestic State aid system which is modelled on the requirements and principles of EU State aid rules on the basis that:

(a) such a system is desirable so as to provide for continuity and assurances to the market that post-Brexit, competition in the UK would remain fair and undistorted from State aid interventions and so as to limit the risk of devolved governments and local authorities competing with each other in a subsidies race; or

(b) the UK is required to implement such a system domestically as a result of the terms of the agreement regulating the UK’s future relationship with the EU.

As regards public procurement, the situation is somewhat different. This is because the EU procurement rules are already implemented into domestic legislation. Accordingly, the assumption must be that the Great Repeal Bill would have the effect of keeping that legislation in place in its current form. The extent to which the UK Government would then be in a position to amend domestic procurement legislation would depend on the nature of the UK’s future relationship with the EU. In this context, in line with earlier comments, there would seem to be two distinct possibilities:

(a) firstly, it is possible that even if the UK is no longer required to implement in full the EU procurement directives in its national legislation, the EU might nonetheless insist, as part of the new agreement with the UK, that UK procurement law “approximates” EU procurement legislation. Depending on the specific terms of such a requirement this might leave little room to amend substantively existing procurement legislation;

(b) in circumstances where the UK is neither required to implement nor to approximate substantively EU procurement legislation, it would seem likely that, in due course, the UK would wish to explore the possibility of amending existing procurement legislation, so as to simplify procedures or introduce other flexibilities to the extent that this is deemed desirable and remains consistent with the requirements of the WTO’s Agreement on Government Procurement (GPA), including the requirement to maintain an effective remedies system.

State aid

The Great Repeal Bill

As noted above, the Government’s intention is to introduce a Great Repeal Bill so that current EU law continues to apply in the UK, after Brexit, as domestic legislation, until such time as the Government decides to amend or repeal this.

In this regard, it is relevant to note that the core provisions of EU State aid law are set out in the Treaty on the Functioning of the EU (the “Treaty”), but there is also a wider body of State aid regulation, including secondary legislation, European Commission communications, guidance and indeed, principles that stem from the CJEU’s jurisprudence and the European Commission State aid decisions. All of these rules are currently binding on the UK by virtue of the ECA without the need for any other national implementing measures.

In circumstances where, as it would now seem likely, an agreement with the EU does not provide for the continued application of EU State aid rules in the UK, it is unclear how the Great Repeal Bill might seek to “domesticate” EU State aid regulation.

One of the key problems in seeking to convert EU State aid rules into domestic law is that, these rules are concerned with the potential distortive effect of State aid on competition in the EU’s internal market (the Single Market). If the UK is no longer part of that market, it is difficult to see why domestic State aid legislation should be concerned with the potential distortive effects of State aid on the EU’s internal market (but see further below about the potential effect of a future agreement with the EU). Separately, under EU State aid rules, it is the European Commission which has the task of determining whether State aid by an EU Member State is consistent with EU law. Again, it is difficult to see how, post-Brexit, UK legislation might seek to make provisions to that effect.

At the same time, given the Government’s recognition that in principle it should be for “competition and free markets” to determine market winners rather than the State, it is possible that the Government would wish to introduce a purely domestic State aid legislation, built on the principles of EU State aid law, but which is concerned with ensuring that public bodies in the UK (including, devolved governments and local authorities) do not grant aid which distorts or threatens to distort competition in the UK, other than in circumstances where carefully defined public interest considerations (again by analogy, where possible, with EU State aid law principles) justify this.

Under such a system, there would be a need for a national State aid regulator, with the Competition and Markets Authority, being an obvious candidate.

Of course, absent any requirements under a future agreement with the EU for the UK to comply with EU State aid rules (or introduce substantively similar domestic legislation), the UK could choose to introduce a simpler regulatory anti-subsidies regime which is only concerned with ensuring the UK’s compliance with the less strict WTO Agreement on Subsidies and Countervailing Measures (the “WTO anti-subsidy rules”). These do not require, for example, the clearance of aid before implementation or the introduction of a national State aid regulator.

However, there is an argument that relying on WTO anti-subsidy rules alone might not be sufficient to provide the markets with the assurances which the Government is quite rightly keen to provide that the UK is “open for business”. Consistent with that message is the idea that enterprises can compete on the UK market on the basis of a level-playing field underpinned by a world-class competition regulatory regime, which would include strict limits on the State’s ability to distort competition through State aid interventions. At the same time, complaint procedures and the introduction of an independent State aid regulator, with the power to seek the recovery of unlawful State aid, would ensure the fair implementation of the regulatory regime. Such a system would also have the benefit of limiting the risk of devolved governments or local authorities engaging in a subsidies race as a means of attracting local investment.

However, as already suggested above, over and above such considerations, it is also possible that the implementation of a State aid national system based on EU law principles is a requirement of the agreement which would regulate the UK’s relationship with the EU, after Brexit. This point is discussed further in the following section.

Requirements of a future agreement with the EU

Given that the UK would not be seeking continued membership of the Single Market, it would seem unlikely that a future UK-EU deal would involve EU State aid rules applying directly in the UK. However, it is also worth considering the possibility that the EU might insist on the UK introducing some form of State aid legislation which is consistent with EU State aid rules, even in circumstances where access to the Single Market is more limited (for example, in circumstances where access is limited to goods or goods and certain services).

There are already a number of precedents in this regard. For example, Turkey’s (1995) customs union arrangements with the EU (which provide for the free trade of most goods and the application of a common tariff vis-à-vis third parties) also incorporate requirements for the “approximation” of certain EU laws - essentially requiring Turkey to implement laws in specific fields, which are consistent with EU legislation. In this context, the Turkey-EU agreement provides that the EU can raise objections against aid granted by Turkey which the EU “would have deemed unlawful under [EU] law had it been granted by a Member State.”

More recent EU association agreements with European countries, incorporate approximation of EU law requirements which are even more specific, including as regards State aid regulation. For example, the EU agreements with the former Yugoslav Republic of Macedonia (2004), Serbia (2013) and the Ukraine (2014), incorporate detailed State aid requirements, based on the EU State aid rules. In this context, it is a requirement of each of these agreements that national State aid provisions are interpreted in a way which is consistent with the interpretation of EU State aid rules. Separately, the more recent agreements with Serbia and the Ukraine also require, among other things, the introduction of an independent regulator with the necessary powers to ensure compliance with State aid rules, including the power to recover unlawful aid.

It might be argued that such requirements in EU association agreements with these and other European countries are justified on the basis that, ultimately, these countries are interested in achieving full EU membership (indeed, the former Yugoslav Republic of Macedonia and Serbia are accession candidate countries). On that basis, therefore, the EU should not insist on imposing similar obligations on the UK.

However, it would seem unlikely that the EU would adopt a different approach vis-à-vis the UK merely on the basis that the UK is exiting, rather than seeking to join, the EU. If anything, that in itself might provide sufficient reasons for the EU to seek to ensure that any access to its internal market, is conditional on approximation of various EU law requirements including in relation to State aid legislation. In this way, the EU may limit the risk of the UK, subsidising its own companies, or using subsidies so as to attract investment at the expense of the EU. Insisting on approximation of EU State aid rules in the context of a future UK-EU agreement would also make it easier for the EU to seek a remedy against the UK in the event of a dispute over subsidies rather than having to rely on the more complex, time-consuming and ultimately, less effective, WTO anti-subsidy rules.

Public procurement

The Great Repeal Bill

As already noted, the situation regarding public procurement is somewhat different in that EU public procurement legislation is already implemented into UK law. Accordingly, the expectation is that in seeking to “domesticate” existing EU law by means of a Great Repeal Bill, existing UK procurement legislation would remain substantially the same, on the first day of Brexit.

At the same time, it might be necessary to make some changes to reflect the UK’s new status as a country which is no longer a member of the EU. For example, procurement legislation currently provides that contracting authorities owe the same duty to suppliers from other Member States of the European Economic Area (EEA), that is the EU Member States plus Iceland, Liechtenstein and Norway, as they do to UK suppliers. Would this continue to be the case after the UK’s exit from the EU or would EEA members be accorded protection only to the extent that this is necessary to comply with the requirements of the WTO’s plurilateral Agreement on Government Procurement (GPA)?

Similarly, the procurement regulations incorporate a number of provisions which reflect other Single Market requirements, such as in relation to technical standards or recognition of certificates from bodies in other EU Member States. Would these arrangements continue after Brexit?

What would be the status of the European Single Procurement Document, the self-declaration document which contracting authorities are currently required to accept as preliminary evidence that a supplier meets the relevant requirements to participate in a procurement process?

What about the special provisions of the legislation which regulate joint procurements involving UK contracting authorities and contracting authorities from other EU Member States, would these continue to be relevant?

Incidentally, the UK’s exit from the EU is also likely to require some minor changes to the EU procurement directives, such as the deletion of the part of Annex I to Directive 2014/24 which lists the UK’s “central government authorities”.

As already noted, ultimately, the extent to which such changes might be necessary would depend on the terms of the agreement which would regulate the UK’s post-Brexit relationship with the EU.

In this regard, it is worth noting that the EU’s relatively recent trade agreement with the Ukraine provides detailed provisions on public procurement. These essentially require the Ukraine to implement (with some small exceptions) EU procurement legislation in its laws. According to the agreement, in this process of “legislative approximation”:

“due account shall be taken of the corresponding case law of the European Court of Justice and the implementing measures adopted by the European Commission as well as, if this should become necessary, of any modifications of the EU acquis occurring in the meantime… The European Commission shall notify without undue delay Ukraine of any modifications of the EU acquis. It will provide appropriate advice and technical assistance for the purpose of implementing such modifications”.

How likely is it that similar provisions might be included in an agreement regulating the UK’s future relationship with the EU?

In seeking to answer this question, it is relevant to keep in mind that the Ukraine’s approximation of EU public procurement law was linked to the reciprocal opening of the EU’s and the Ukraine’s public procurement markets to each other’s suppliers. It is also relevant that the Ukraine is a country which is seeking to strengthen as much as possible its relationship with the EU.

The UK’s position is obviously different, in view of Brexit. Also, on the basis that the UK would continue to be a party to the GPA2 after Brexit (whether because it is already a party to that agreement in its own right or because it would seek to “regularise” its position in relation to that agreement following Brexit) UK companies should maintain access to the EU procurement markets in most respects. That might mean that the UK might not be particularly interested in agreeing with the EU the type of detailed public procurement law provisions that have been incorporated into the EU’s trade agreement with the Ukraine.

Ultimately, these issues would be determined as part of the negotiations for a new agreement with the EU. It might be, for example, that continued public procurement law compliance with the EU acquis is one of the EU requirements for granting the UK continued access to any parts of its internal market.

UK procurement law post-Brexit and GPA compliance

On the assumption that post-Brexit, UK procurement law would not need to comply with the EU procurement legislation but only with the GPA, it would seem likely that in due course the UK Government would want to consider the extent to which this might permit the simplification of procurement procedures or the introduction of other flexibilities into the legislation.

An obvious example where an amendment is likely, in those circumstances, is in relation to the procedures which permit negotiations with bidders. At the moment, public procurement regulations permit negotiations in the context of a “competitive dialogue”, a “competitive procedure with negotiations”, as well as in the context of “innovation partnerships”. It is possible that the UK might consider that these three procedures should be replaced by a new simpler negotiated procedure (of the type currently permitted under the more flexible procurement regime which applies to certain utility companies). Under such procedure, a contracting authority would be at liberty to structure discussions with bidders in a way which meets its requirements for a particular procurement, subject to compliance with the principles of fairness and transparency.

In fact, the GPA rules would allow the UK to go even further so that, if deemed desirable, domestic legislation could provide, that a contracting authority may reserve the right to carry out negotiations in circumstances where it appears from the evaluation that “no tender is obviously the most advantageous” in terms of the specific evaluation criteria that had previously been disclosed. However, in considering its options in this regard, the Government is also likely to be mindful of potential cost implications if it were to amend the legislation so as to make it easier for contracting authorities to negotiate contract awards.

There would be other areas too where the UK might decide to amend current public procurement legislation and still be compliant with GPA requirements. However, again, arguably there are limits to the extent to which the UK would deem it desirable to simplify legislation, even if on the face of it, that might be permissible under the GPA.

For example, the GPA does not expressly require that there should be a "standstill period" (a pause), between the notification of the award decision and the conclusion of a contract. Be that as it may, it would seem unlikely that the UK would be minded to take away rights which bidders currently enjoy and remove provisions such as this which seek to ensure that public procurement in the UK is fair and transparent and underpinned by an effective remedies system. Among other things, such an approach is likely to affect adversely the confidence of the bidding community in the UK public procurement markets and be inconsistent with the “open for business” message. It is for the same reasons that, post-Brexit, changes to the current procurement remedies regime, should in general be limited even if compliance with the EU procurement regulations is no longer required.

Overall, in the event that it is no longer necessary to implement EU procurement laws in the UK, it is likely that the Government would seek to explore ways in which to make procurement legislation more efficient. In this context, it would seem unlikely that any changes to the current procurement rules would be such as to affect adversely the fairness and transparency of the procurement regulatory system.

Finally, it is worth keeping in mind that since Scotland has its own procurement legislation, it might be that in the event that it is no longer necessary to implement EU procurement laws in the UK, the Scottish Government might decide to amend its own procurement legislation in a different manner to that of the rest of the UK, although again, it would be expected that the Scottish Government’s approach would be consistent with the above conclusions.

  1 - Prime Minister's annual speech at Mansion House in London, 14 November 2016 and comments by the Chancellor of the Exchequer at the House of Commons, 19 October 2016.

  2 - Incidentally, since May 2016 the Ukraine is also a party to the GPA. However, over and above the fact that its bilateral arrangement with the EU grants it greater access to the EU’s procurement markets than the GPA arrangements alone would have done, there might also have been political reasons for the Ukraine agreeing to adopt the EU acquis in public procurement, given its desire to strengthen as much as possible its relationship with the EU.

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