Application of competition, state aid and public procurement rules after Brexit
Published 12 July 2016
It will come as no surprise that at the forefront of everyone's minds at the moment is Brexit and what it means for their lives both personally and professionally. As EU lawyers at DAC Beachcroft, we had already given a great deal of thought to what an "out" vote could mean for competition, state aid and public procurement rules, all of which are intrinsic to the EU Single Market, currently the world's largest economic zone.
The big question is what happens now? At the moment, nothing really changes. Article 50 TEU needs to be invoked by the UK giving formal notice, after which we can expect at least two years of negotiations. In the meantime, all the relevant laws will continue to be applied (and enforced) as before.
Once negotiations have been settled, the picture is likely to be as follows:
- Competition rules – no change expected in relation to the basic rules but some variation possible in relation to procedures and/or enforcement.
- State aid rules – application would have to be renegotiated but application in at least some shape or form is likely.
- Public procurement rules – likely to apply in their current shape and form. Future changes, eg, through non-implementation of EU reforms, will be dependent on the outcome of negotiations in relation to the future relationship between the UK and the EU.
Here, we run through a detailed analysis for each set of rules:
- Two different sets of competition rules apply in the UK: UK and EU competition rules. Both sets of rules are divided into two sets of sub-rules: these account for behavioural competition, prohibiting anti-competitive agreements between undertakings as well as abuses of a dominant position by an undertaking), and merger rules.
- It is to be expected that UK competition rules, both behavioural competition and merger, would largely continue to apply in their current shape and form. This is likely to be the outcome despite the fact they largely originate from the EU.
- The reason is that, nowadays, over 130 jurisdictions – and all developed countries – have competition rules. Many have shaped their laws in accordance with the EU model.
- The UK would, therefore, actively have to repeal existing UK laws that also exist (in almost identical form) in numerous non-EU countries and are considered an important framework for (international) trade. However, specific consideration may have to be given to areas where domestic rules refer to EU rules, eg, in relation to block exemptions.
- As to EU competition rules, these would also continue to apply whenever their scope is engaged.
- For example, EU behavioural competition rules apply whenever an activity is likely to have an impact on trade between EU member states. This does not depend on where a business is based, but on where it has activities. In other words, these rules also apply to companies based in China, etc, whenever they do business within the EU. In the same vein, planned transactions have to be notified to Brussels whenever the thresholds of the EU Merger Regulation are met.
- Differences could occur in areas such as procedural rules as well as enforcement, depending on the outcome of the negotiations between the EU and the UK (as to possible outcomes of any negotiations, see below under 'State aid rules').
- For example, EU mergers that fall under the EU Merger Regulation are currently granted an EU wide-clearance (one-stop shop principle). This would cease to apply to the UK in case of its exit, with the consequence that mergers may have to be notified both the EU Commission in Brussels and to the CMA, unless the UK and the rest of the EU negotiate something else.
- As to differences in enforcement, it is currently unclear to what extent UK courts will still have regard to future EU Commission decisions and EU court judgements.
- As opposed to competition rules, state aid rules (which aim to establish a level playing field for businesses by general prohibiting government subsidies to undertakings) are specific to the EU.
- Whether or not state aid rules will continue to apply to the UK once it has formally left the EU will largely depend on the outcome of negotiations between the UK and the rest of the EU. The UK Government has predicted that such negotiations would take around ten years.
- Considering the close (economic) relationship between the UK and the rest of the EU, there is some likelihood that state aid rules will continue to apply in at least some shape or form. Much will depend on the extent to which the UK would like to have access to the EU Single Market. Indeed, continued access to EU funding may also play a role.
- Negotiations between the UK and the EU could have three different potential basic outcomes: (1) the UK could remain in the European Economic Area (EEA); (2) the UK could enter into a Free Trade Agreement (FTA) with the EU, or (3) the UK could decide to adhere just to WTO rules. Other outcomes have been mooted but they are variations of these three basic options.
- If the UK is a member of the EEA, state aid rules continue to apply, with specific enforcement bodies being in charge of surveillance (and the UK, as a non-EU member state, having no say on the adoption of future state aid rules).
The EEA model is the model that is the most integrated with the EU Single Market. For example, Norway (one of three EEA members that are outside the EU) has wide-ranging (but, compared to EU members, still limited) access to the Single Market. In return, it has had to adopt almost all the EU legislation regarding the Single Market (i.e. competition, state aid, public procurement rules, etc).
- In between membership with the EEA and mere adherence to WTO rules, there would be the possibility of a Free Trade Agreement (FTA).
This can take many different forms. The EU has currently negotiated 53 such FTAs with other countries - for example, with Canada (quite wide-ranging; took seven years to negotiate; not yet in force) and Turkey (much less wide-ranging). The EU has tried to impose state aid rules in many of these FTAs (and also at WTO level - see below), with varying degrees of success.
As a rule of thumb, the greater the access to the Single Market, the more related EU rules must be adopted. In some cases, this is not really the result of differing negotiation powers; it is simply not possible to legally import goods or services into the Single Market without complying with certain EU rules (which is why such rules are also called ‘non-tariff barriers’).
If the UK decided to go down this route, because of the close (trade) relationship between the parties, it is likely that state aid rules would continue to apply in at least some form.
- Mere adherence to WTO rules would be the clearest cut from EU membership. For example, it would mean that tariffs for imports and exports would have to be re-introduced. Because of the Most Favoured Nation principle enshrined in WTO rules, the EU would have to apply the same tariffs for imports and exports into and from the UK than into and from China or Russia, and vice versa.
In this case, EU state aid rules would be unlikely to apply (although note that the WTO has, following heavy EU lobbying, a similar albeit less stringent set of rules in place).
Because of the close (trade) relationship between the UK and the rest of the EU, the current public view is that this is unlikely to happen. However, even in this case EU state aid rules could continue to apply to the UK. Apart from access to the EU Single Market, the other potentially important factor for the continued adherence to EU state aid rules would be the UK’s access to EU funding. For example, last year the British Business Bank and LEPs in the North of England created the Northern Power House Investment Fund with over £400m of funding, most of it coming from the EIB, which also invests outside the EU. Numerous other EU funding programmes are on their way.
- As with state aid rules, public procurement rules (which regulate buying procedures whenever the state intends to buy goods, services or works above certain financial thresholds) are intrinsic to the EU Single Market. In theory, therefore, the UK would have a greater ability to change or revoke that legislation.
- However, radical change is unlikely, even in the longer term: as with UK competition rules, the implementing legislation is governed by English (and Scottish) law, which would mean that the UK would have to actively repeal existing laws.
- As with competition rules, public procurement rules also exist in many different jurisdictions outside the EU.
- Finally, the EU has greatly influenced the General Procurement Agreement (GPA), a pluri-lateral agreement that was initiated by the WTO. The UK is currently a signatory to the GPA through EU membership but would most likely sign it as an autonomous member in case of its exit from the EU, much like the USA, Canada, China and Japan,.
- Whether the UK would implement future changes to the recently-revised EU public procurement rules would probably depend on the outcome of any negotiations between the UK and the EU as to the form and shape of their future economic relationship. What is clear, though, is some changes may also incur in relation to enforcement.