David Walker: What will Brexit mean for public sector contracting?

Contracting firms’ share prices have been yo-yoing, but all the Conservative leadership contenders are on-side and some are positively bullish about expanding private sector involvement

By David Walker

08 Jul 2016

Now is the time to deploy some higher maths, for how else to catch the multiple interactions and probabilities of the possibilities post-Brexit?

In the matrix, you could factor (for example) an Andrea Leadsom premiership. If only part of her policy baggage arrives in Number 10, we could see radical deregulation of both labour markets and the public sector. In another box there’s the likelihood of fiscal loosening (more public spending or further tax cuts). But adjacent to that, there’s “balance of payments crisis” + “interest rate rises”.

Down table, compute the prospect of the Labour party imploding. That would give the Tories free rein at Westminster. Locally, it could split the leadership of Labour councils, depriving the party of control in some city halls and reversing procurement policy.

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Whitehall will be distracted by the negotiations for months and years, possibly encouraging directors-general to roll over existing contracts, in order to avoid re-commissioning. But if you supply HM Revenue and Customs, what price reconfiguring the tax system if VAT is done away with or recalibrated? If you supply the NHS, what does the health service's chief executive Simon Stevens do when — almost certainly — his plea for the mythical £350 million a week supplement paraded by the Leavers is ignored?

Then there are supply-side questions. Companies big and small, along with public service employers, can only wait while immigration, nationality and right to work in the UK are sorted - and who knows how long that could take? Still, early predictions of paralysis have given way to a sense that while the big picture remains as densely impenetrable as a sea fog, at lower levels, it’s pretty much business as usual.

Some will win prizes. Early contenders include consultancies that can, or at least pretend they can, fill gaps in government expertise. Within hours of the result, the Big Four and McKinsey were mobilising, setting out their stall to Jeremy Heywood, as his predecessor Andrew Turnbull told an audience at the Institute for Government.

For local government, the consequences of Brexit are mostly going to be indirect, which may explain the dozy response of its leadership. At the Local Government Association annual conference, Conservative chairman Gary Porter announced he would be backing whichever candidate for leader would give councils the best deal — a pragmatic stance, but not necessarily the best way of winning the loyalty of whoever does succeed.

Meanwhile, communities secretary Greg Clark made a strong commitment to including councils in the negotiations being convened by Oliver Letwin in the Cabinet Office. But isn’t Sadiq Khan also going to demand a place at the table? And possibly the mayors of the combined authorities, along with the Scottish and Welsh first ministers and a handful of Stormont politicians? Sounds like a big table.

And what does happen to the mayors, and particularly the "Northern Powerhouse", with George Osborne’s departure surely only a matter of weeks away? The impetus behind devolution is already dissipating. The referendum hardly proved that the voters of Sunderland, Oldham or Sandwell, disaffected as they are, are suddenly going to enthuse about the "Northern Powerhouse", or its variants in the West Midlands and the North East.

PwC is to run research on attitudes, expressing the pious hope that, with uncertainty at Westminster, now should be the time for local and regional leaders to come together, bathed in a sudden flush of local trust.

Theresa May is no great admirer of councils — witness her pushing ahead with police and crime commissioners separate from local government. She is, however, an attested reformer, who might cast a baleful eye on council boundaries and functions, opening the door to more shared services or even full-scale reorganisation.

Amid the uncertainty, two things can be said with fair confidence. The first is about contracting.

The political climate is set fair. Contracting firms’ share prices have been yo-yoing, but all the Conservative contenders are on-side and some are positively bullish about expanding private sector involvement. As prime minister, May would surely appoint a home secretary to carry on her plans for police and fire, expanding opportunities. It would be a miracle if Labour’s electoral fortunes recovered and if the party split, one side could remain as enthusiastic about contracting as the Blair and Brown governments were.

Second, here’s a bit of unassailable logic. When the government pushes the formal leave button, procurement will change, even before the rulebook is redrafted and OJEU — the Official Journal — gets dumped. That could affect small firms; it is unlikely not to affect international companies.

Revising “England-only” rules will be complex, but the nationality of contractors could start to matter, if ministers and councillors start to examine corporate ownership. Stand by for extra spending on lobbying.

However, it’s not clear whether that would bring problems — at the moment, the value of public sector contracts won by companies in other EU countries are worth only about 3 per cent of the total market

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