The contraction in the UK’s steel industry has led to big job losses this year in Redcar, Scunthorpe and Lanarkshire. Last year saw hundreds of jobs go in South Wales. As part of the Government’s effort to respond,the Crown Commercial Service published a PPN in early November, setting out the policy to be followed by central government in its procurement of steel in works contracts valued above £10 million. The PPN identifies a number of recommended steps including early market engagement and transparency regarding subcontracting opportunities; robust application of exclusion and selection criteria, including those related to health and safety and environmental compliance; the application of whole-life costing to steel purchases including the cost of emissions; and use of environmental and social award criteria.
These approaches are all possible due to the enhanced ability to take non-price considerations into account under the Public Contracts Regulations 2015. The purpose of developing these rules under the new EU procurement directives was to encourage procurement which is sustainable in the environmental, social and economic sense. However both the preamble and the timing of the PPN make it clear that the purpose of the measures is to ensure UK steel suppliers can ‘compete effectively’ – or to put it another way, to reduce the proportion of foreign steel being used in public contracts. Is this a legitimate way to use the public procurement rules? Is it likely to succeed, and if so at what cost?
While the issue is sometimes simplistically put as one of Chinese versus British steel, 69% of the steel imported to the UK comes from other EU countries.[1]The UK actually ran a small trade surplus for steel in 2014 – despite the value of the industry declining by 42% since 1990.
On the world market, there is a glut of steel due to higher production and sluggish demand, including in China. Productivity in the sector has also gone up, meaning fewer people are employed. State aid rules prevent direct subsidies to UK steel manufacturers, however there are moves to put anti-dumping measures in place at EU level against low-priced Chinese steel. The Government has also introduced a scheme to compensate the steel sector for the cost of climate change policies – effectively removing the incentive to reduce the carbon footprint of the industry.
Even if it is accepted that the Government should take measures to support the steel industry, procurement may not be the best tool to address this type of market failure. Arguably a non-competitive industry shrinking is not a market failure but a market success – although it does not feel that way to those who have lost their jobs. The Government should do everything in its power to develop alternative industries in which the UK can compete successfully, and to support the transition in skills needed to make these viable. It should not waste resources propping up industries where there is a fundamental inability to compete due to factors which it cannot meaningfully influence, or cannot influence without sacrificing other economic or social policies of equal importance.
Without citing any evidence regarding the effect of current procurement practices on UK steel companies, the PPN clearly implies that sustainability criteria will make it more difficult for foreign companies to win contracts. There is an important difference between using procurement rules in this way and using them with the actual motive of reducing greenhouse gas emissions, improving working conditions or other objectives. If the latter were the true motive of the PPN, one might expect to see some reference to how these issues arise in the steel supply chain and how they can be addressed by all suppliers.
The objective of environmental and social criteria may be partly to keep ‘bad’ suppliers out – but they are much more powerful where they have the ability to positively influence industry practices, for example to reduce emissions. If European and other suppliers see such criteria as a tool to keep them out of the UK market, they will be rightly cynical as to their ability to win contracts even if they do make the desired changes to their production process. The argument is sometimes made that other EU countries keep more of their public sector contract spend for national companies, so protectionist measures adopted by the UK are merely evening the score. This is not however borne out in the available figures – which show that the UK spends less than France, Italy, Poland and Spain on public contracts awarded to companies based in other Member States.[2]
There are those who already equate sustainability considerations in public procurement with protectionism. Fortunately the legislative environment now refutes this argument, making clear that environmental and social considerations can coexist with competition and cost-effectiveness in procurement. However the hard work which went into achieving this recognition could easily be undone if Member States start using exclusion criteria and life-cycle costing with the primary purpose of favouring domestic suppliers. Interestingly, it may also not work for two reasons. First, the manner in which the exclusion criteria set out in Directive 2014/24/EU have been implemented in UK law focuses on companies which have committed offences under national law, and only secondarily under the law of other jurisdictions. This contrasts with the approach in Germany, for example, which takes a much more international view of such matters. Second, the results of life-cycle costing are difficult to predict and depend on the method and monetisation technique applied. It does not consistently favour domestically-produced goods.
If the concern about working conditions, environmental compliance and greenhouse gas emissions shown evinced by PPN 16/15 are genuine, why is there no policy requiring these factors to be taken into account in public procurement generally? Why was the decision taken not to fully implement Articles 18.2 and 57 of Directive 2014/24/EU (dealing with compliance with environmental, social and labour law and exclusion of bidders, respectively) in the Public Contracts Regulations?[3]It looks like a very selective approach to these matters, with a short term focus. This is unlikely to solve the steel industry’s problems, and may create new ones for the public sector and society as a whole.
[1]Rhodes, C. and Booth, L. UK steel industry: statistics and policy House of Commons Library Briefing Paper, 26 October 2015
[2]Sylvest et al (2011) Cross-border procurement above EU thresholds: Final Report (Brussels: European Commission), p. 41
[3]See discussion of this in my submission on the draft Public Contracts Regulations 2015, available here.