Government contracts have been placed under increasing scrutiny this year. The collapse of Carillion and profit warnings at other major public sector suppliers spooked the markets and pushed government procurement into the spotlight. While this has sparked questions from many quarters on whether the system of outsourcing is fit for purpose, another risk to the viability of some public sector contracts has now emerged in the form of Brexit.
The impact of Brexit on UK public procurement has, until now, been largely overlooked. There is limited awareness that many of the public contracts issued by contracting authorities as varied as the Ministry of Justice to local authorities, receive significant funding from the EU through programmes like the European Regional Development Fund (ERDF) and European Social Fund (ESF).
Since January 2015, £1.6bn of UK public contracts have been awarded with full or partial EU funding. Ironically £1.3bn of this amount was actually issued since the EU referendum vote, mostly in the last three months of 2016. If anything, this figure is understated, since it does not include the EU’s financial contribution to government contracts issued through “frameworks”, which are essentially preferred supplier lists around which there is less official disclosure.
Analysis by Tussell of public contracts aggregated by the UK’s main official procurement portals has identified that there is a black hole of £433m worth of EU-backed government contracts that are due to expire before Britain departs from the EU in March 2019. The majority – £393m – roll off in the next four months. While the UK government has guaranteed funding for projects continuing after Brexit, it is not clear what will happen to those contracts that expire before we leave the EU.
The sector that is especially dependent on EU investment is education and skills. The Education and Skills Funding Agency (ESFA), an executive agency sponsored by the Department for Education that is accountable for funding education and training of young people and adults, has been a particular beneficiary of funding by EU programmes. Since January 2015, it has issued public contracts worth £425m with full or partial funding from the EU. This accounts for 76 per cent of ESFA’s total award value over the period.
Other organisations in the education and skills sector that directly benefit from EU funding include Lancaster University’s £60m redevelopment of its Management School, and the Welsh government’s £51m investment in “Entrepreneurship and SME Support Services”, both of which are among the 10 largest public contracts partially funded by EU programmes.
Stepping back, it’s worth remembering the scale of UK public procurement: in 2017 alone, the wider public sector issued new contracts with a lifetime value of £220bn. In that context, £1.6bn of EU-funded public contracts over the last three years is small. It is also important to remember that the UK is a net contributor to the EU budget overall, so some of this EU funding of public procurement is merely another channel for getting back a share of what the UK has already contributed.
However, in a few sectors like education and skills, and in some specific regions like Wales – which voted heavily in favour of Brexit – the proportion of public contracts with EU funding is not insignificant. In fact, since January 2015, over 1,000 UK public contracts with an average contract value of £1.5m were partially funded by EU programmes.
Questions about the impact of Brexit on EU funding of farm subsidies were raised right at the start of the Brexit debate. Now the impact of Brexit on spending on education and skills has come to light as well. The government has pledged to continue funding EU programmes that extend beyond the date when Britain leaves the EU in March 2019. This pledge will be tested even sooner than expected: will it include funding to renew or replace the £393m of public contracts with full or partial EU funding that expire in the next four months?
It is a testament to the UK government’s openness that procurement data can be analysed in sufficient detail to quantify the impact of EU funding. In less transparent environments, the scale of this potential funding shortfall may not have come to light in the first place. But since the data is open, questions now need to be answered. At a time when the UK economy is already assailed by uncertainty and austerity, a previously overlooked Brexit-related trade-off has reared its head.
Gus Tugendhat is the founder of Tussell, a data source on UK government contracts.