UK Government Wants To “Change Procurement Rules” to Bail Out Steel Industry – Here’s Why It Won’t Work

Chinese demand

Last November the Crown Commercial Service issued a guidance document around how public procurement could legitimately and legally support the British steel industry. Fast forward to last week, and Indian-owned Tata Steel announce they are pulling out of the UK, and hope to sell their interests including the huge plant at Port Talbot in Wales. There are fears for 40,000 steel jobs in the UK, as the fall in global steel prices bites.

But why has the price fallen so much? Is it a) caused by a natural free-market response to over capacity, and a healthy correcting mechanisms that will increase demand back to an equilibrium point or b) Chinese steel producers, favoured by subsidies, low energy prices in China (compared to the UK where taxes are high, in part to achieve self-imposed CO2 targets) and a lack of regulation from their government, dumping steel at low prices on the European markets?

Make your choice as to which you prefer to believe. But what is clear is that the procurement guidance has not had any real effect. That's not surprising - technically we thought it was a decent enough document and policy statement but in the short term, the amount of steel bought by the public sector is negligible. But over the weekend, the government announced a further step. As far as we can tell, they have extended the guidance to cover the wider public sector – the NHS and local authorities in particular.

According to City A.M. these bodies “will need to consider responsible sourcing, the training suppliers give to their workforce, carbon footprints, protecting the health and safety of staff and the social integration of disadvantaged workers during contract procurement. They will also have to advertise so that UK firms can compete while the government will create a pool of approved steel suppliers to "ensure a level playing field".”

The Business secretary Sajid Javid said “By changing the procurement rules on these major infrastructure projects we are backing the future of UK steel - opening up significant opportunities for UK suppliers and allowing them to compete more effectively with international companies."

Well, he can’t “change” the European procurement rules if course, but he can suggest that buyers take into account those wider social factors, within the regulatory envelope as you might say. It’s an attempt at protectionism, and you can totally understand why a politician would want to be seen to be doing something, but it is a gesture, no more than that.

The main reason why it will have limited effect is that public sector contracting authorities hardly buy any steel themselves. Surrey County Council or Frimley Park Hospital advertising for suppliers of steel? I don’t think so. Steel purchasing is at least one step if not two down the supply chain – so the supplier who wins the contract for a new building might buy steel, or it may even be one of their sub-contractors.

Now getting those contractors to buy British steel is a tough one. You can’t really insist they do that, and if there is a cost penalty for them in doing so, how do you ensure they don’t lose the bid to another contractor who buys cheap Chinese steel? Asking them to take into account all the social value factors might be possible – but it would require a massive change of approach in terms of how contracts are let.

The other issue is the time-lag. Steel will presumably already have been ordered for most current projects, so we would need to see huge new spend on capital projects that use a lot of steel. A few battleships maybe? But we’re in austerity in the UK and public sector capital spend fell by a third after the 2010 election and has not yet recovered.

So we can confidently - if sadly – predict that these new statements will have little or no effect other than to make Javid look like he is at least trying. But going back to the basic issues here, intrinsic free-marketers like me do struggle somewhat. I do broadly believe in the theory of comparative advantage, which says countries should produce the goods and services that they are best equipped to produce, and trade freely to obtain the rest. So the UK should focus maybe on high-value food and drink, pharma, business and professional services, music and the arts ... let China and India do the dirty, heavy industrial stuff.

But there are two problems with that. Firstly, it assumes a symmetry of approach, so other countries have to be equally open, and that's certainly not the case. Our supermarkets can't operate in India, and China slaps tariffs or restrictions on pretty much anything it wants to keep out. And secondly, we start running into issues of national security. If the UK lost all steel production capacity, would it matter? What if we even needed to build a lot of tanks or planes in time of war? I know it is unlikely but you never know.

Difficult issues. But it is another reason why my view is that we might have passed the high-water mark for "open markets", adherence to EU procurement regulations, and so on.  I fear we may be entering a period where we will see a lot more protectionism, national and sub-national preference in public procurement, and similar tendencies. I'm not saying that is a good thing, but it is easy to see how that might happen – and that applies whether or not the UK pulls out of the Europe and President Trump builds his physical and metaphorical walls around the US.

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