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Brexit: Implications for Competition

We cover below the prospective risks (and, where relevant, opportunities) presented by Brexit in the connected fields of Competition, Public Procurement and State Aid.

Each of these areas derive primarily from EU law (in the latter case, directly from the Treaty on the Functioning of the EU itself).

Competition Law

The purpose of competition law is to ensure that competition works properly within national and international markets.  Principally, it does this by prohibiting cartels and anti-competitive agreements between rival firms and also outlaws businesses in positions of market dominance from abusing that dominance. 

Following Brexit, competition law will continue to apply within the UK.  Currently, the UK competition regulator (the Competition and Markets Authority, or CMA) enforces both UK competition law (principally, the Competition Act 1998) and EU competition law (which is set out in Articles 101 and 102 of the EU Treaty).  Although these two sets of rules are very similar, the latter focuses more on cross-border situations whereas the former looks at markets with a purely UK dimension.

Significant Impact post Brexit

With regards to merger control, the EU currently has exclusive jurisdiction to review those mergers which meet the jurisdictional tests of the Merger Regulation.  Effectively, this means that the UK competition regulator does not have power to look at the bigger proposed corporate takeovers where these have a cross-border impact.  Following Brexit, however, the CMA’s jurisdiction over such transactions will not be ousted by the Commission, but shared with it.  That will mean that UK merger rules will become more relevant for acquisitive businesses.  We can expect to see a significantly higher number of proposed deals investigated by the CMA.   Certain takeovers will need clearance in London as well as Brussels.

 

Potential Significant Impact post Brexit

Currently, the CMA is a member of the European Competition Network, a network of competition law regulators from different member states, which liaise and coordinate cross border competition law cases. 

Following the UK’s departure from the EU, we see the CMA having a freer hand to choosing and applying UK competition law to those cases with a UK nexus which are of interest to it.  The regulator will be freed from the responsibility of enforcing EU competition law, with the possible consequence that it may spend more time analysing competition in local, domestic markets within the UK.  This could mean a greater number of businesses fall under its scrutiny than was previously the case.

Our advice to clients that it is more important than ever to have in place an effective compliance program.   This should cover issues such as:

  • ensuring that the company avoids any suggestion of collusive behaviour (for example, price fixing with competitors);
  • what to do in the event of an investigation by a competition regulator.  “Dawn raids” can be stressful and unpleasant.  Swift and appropriate steps must be taken to protect the company’s position and defend its interests, avoid heavy fines and ensure the business can focus on productive commercial activities;
  • avoiding anti-competitive provisions in leasing agreements.  For example, agreements to rent units in shopping centres or malls frequently grant the tenant some form of immunity from competition.  It may be for instance that a retailer would provide that no other similar types of retailer could establish there.  Such a provision could fall foul of competition law if it is unreasonable in scope or duration;
  • ensuring supply agreements are compliant.  Agreements with suppliers of raw materials for example, could risk being declared ineffective if they contain exclusivity clauses that are too long or any other term that prevents or restricts competition;
  • avoiding any abuse of dominance, for example, in local markets or in relation to “essential facilities” such as ports, air and cargo terminals and other transport hubs; and
  • commencing or defending competition law claims in the Courts.



Lower Impact post Brexit

Whilst there are challenges, increased competition policy enforcement at home could also present an opportunity for businesses.  It may be easier to draw the regulator’s attention to anti-competitive conduct which is preventing it from expanding its operations.  It could be for example that a business is locked out of areas where it would like to establish operations by exclusivity clauses in leases, national dominant businesses or long-term supply arrangements. 

Aside from providing advice on specific situations, we also provide training on competition law to our clients.  This assists in ensuring that their personnel are aware of the business’ legal obligations and avoid any behaviour that could constitute an infringement. 




State aid

The EU’s rules on state aid lay down a general prohibition on the grant of subsidies or other financial advantages from government bodies to private businesses where this would risk distorting competition and is likely to affect trade between member states. 

Under Article 107 of the EU Treaty, State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. Therefore, subsidies granted to individuals or general measures open to all enterprises are not covered by this prohibition and do not constitute State aid (examples include general taxation measures or employment legislation).

This has limited the ability of the UK, for example, to prop up failing industries such as steel and to shield such sectors from the challenge of competition from cheaper, imported alternatives.

Potential Significant Impact post Brexit

After Brexit, it is likely that the UK will become a full member of the World Trade Organisation (WTO) in its own right (currently it is represented by the EU in trade negotiations).  The WTO agreement lays down specific provisions on subsidies, containing mechanisms allowing states to protect their domestic industries where they face unfair competition from overseas goods that have benefited from certain subsidies from their home governments. 

The WTO agreement does two things: it disciplines the use of subsidies, and it regulates the actions countries can take to counter the effects of subsidies. It says a country can use the WTO’s dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Or the country can launch its own investigation and ultimately charge extra duty (known as “countervailing duty”) on subsidised imports that are found to be hurting domestic producers.



Lower Impact post Brexit

Following Brexit, the UK will no longer be bound by Article 107.  That may give the Government a freer hand to intervene in the market and to pursue strategic objectives such as supporting start-ups or businesses that are of national importance.  Many, for example, consider that domestic steel production should be supported, because of the central importance of this metal in the manufacturing of defence equipment and infrastructure. 

However, it is possible that the EU will require the UK, as part of a wider trade deal, to continue to observe some of the features of the State aid rules to ensure that competition with UK firms does not become skewed by public hand-outs.  In its trade deal with Canada, the EU has required specific provisions on state subsidies.  For example, there is a non-binding consultation mechanism, whereby parties must endeavour to minimise adverse effects of the subsidy on the complaining party’s interests.




Public procurement

The EU rules on public procurement regulate the way in which government bodies purchase works, services and supplies.  They mandate that contracts above a certain size must be subject to a transparent, open and fair tender process which is open to all interested businesses across the Union.  In particular, they provide that contract opportunities must be advertised in the Official Journal of the European Union and prohibit discrimination against businesses from other parts of the EU. 

Public buying across the European Union accounts for around 19% of the continent’s GDP.  Following Brexit, the UK will no longer be required to implement the EU’s rules which are currently reflected (principally) in the Public Contracts Regulations 2015 and the Utilities Contracts Regulations 2016. 

Significant Impact post Brexit

The public procurement rules ensure that private sector suppliers are more likely to become aware of opportunities and provide guarantees of fair treatment and transparency which ensure their considerable investment in the process is not undermined by nepotism, corruption, protectionism, favouritism or incompetence.  Where things go wrong, they can and do go to court to have contract awards overturned or to seek damages for compensation.   If following Brexit the rules were stripped away or significantly pared back, these safeguards and routes of remedy would no longer be available.

 

Potential Significant Impact post Brexit

Procurement is ultimately about competition.  It opens the way for rival firms to compete against each other for opportunities, thereby bringing down the cost of public contracting overall and driving up the quality of works, services and supplies.  These benefits, which are difficult to quantify in monetary terms, make it likely that the public procurement rules will not simply be abandoned following the UK’s departure from the EU.



Lower Impact post Brexit

For private sector suppliers, the procurement rules are both a blessing and a curse.  The procedural safeguards undoubtedly mean bidders are forced to spend more money on tendering than they would like, filling out more paperwork and disclosing significant amounts of information. 

The level of access that is granted to non-UK firms in the post-Brexit procurement system will, to a significant extent, depend upon the outcome of Article 50 negotiations.  Each side is likely to be keen to maintain access to the other’s public contracting markets and, in our view, it is more likely than not that this will be reflected in any ultimate trade deal with the EU (the EU has included procurement liberalisation provisions in its trade agreements with Canada and South Korea).   We would also not be surprised to see the EU try to protect the application of rules on competitive tendering to UK utilities.



Opportunities

Many see a potential departure from EU public procurement law as an opportunity.  They complain that public procurement rules are too cumbersome and see Brexit as an opportunity to streamline or even abolish them completely, thereby making substantial savings.  One Commission study estimated that procurement costs accounted for around 0.7% of contracts let through the process.  In the UK, that could equate to £240 billion per year.

Equally, the UK government is likely to see Brexit as an opportunity to make the rules more flexible and less onerous to follow.  It will no longer be bound by the EU’s rules on public procurement, which are laid down in seven key Directives.  It will be free to adopt a lighter model.  It may also seek to reduce the scope of the procurement rules so that fewer purchasers are covered. 

We will be interested to see, for example, whether the rules on utilities procurement are preserved; “utilities” include many operators of infrastructure such as ports and airports which are run commercially.  Some commentators consider that there is no rational basis for regulating the purchasing activities of these enterprises, thereby increasing their operating costs and subjecting them to red tape. 

The UK is also likely to sign up to the General Procurement Agreement (GPA), a pluri-lateral arrangement set up by the World Trade Organisation.  The fundamental aim of the GPA is to mutually open government procurement markets among its parties. As a result of several rounds of negotiations, the GPA parties have opened procurement activities worth an estimated US$ 1.7 trillion annually to international competition (i.e. to suppliers from GPA parties offering goods, services or construction services).  We understand that the People’s Republic of China is currently in negotiations with the WTO to accede to the agreement. 

Like the EU procurement rules, the text of the GPA establishes rules that require open, fair and transparent conditions of competition in government procurement.  The GPA, however, is a more principles-based legal instrument than the EU Directives.

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