Procurement Act 2023 – Key changes and the potential impact on private equity investments

What is public sector procurement?

Public sector procurement relates to the process by which government and public sector organisations acquire goods and services from external suppliers. This can include everything from IT services to construction projects and healthcare services.

The procurement process is governed by a set of regulations and legislation designed to ensure equity, promote open competition, and uphold transparency – all while ensuring public funds are spent efficiently. This is in line with nationally and internationally agreed obligations and regulations.

The UK government establishes procurement frameworks that streamline the purchasing process for public sector organisations, by defining pre-approved suppliers and terms. The primary governing legislation in the UK was the Public Contracts Regulations 2015 (PCR 2015), derived from the EU Public Procurement Directive 2014/24/EU. However, in October 2023, a new procurement regime was passed into law in the UK and will be referred to as the Procurement Act 2023.

Procurement Act 2023

The Procurement Act 2023 is expected to come into force by October 2024 and signifies a fundamental change to the current procurement process. It intends to reduce costs for both businesses and the public sector, as well as encouraging greater innovation within the UK.

New features of the Procurement Act 2023 include:

• Structure: Contracts awarded under the separate procurement regimes governing public contracts, utilities contracts, defence and security contracts; will all sit under the umbrella of the new Act.
• Flexibility: Contracting authorities will now have the choice to decide whether to use an open procedure or another competitive procedure of their choice.
• Transparency and notices: The Act introduces planned procurement notices, pipeline notices, transparency notices on the direct award of a contract, mandatory contract change notices and termination notices.
• Excluding suppliers: The Act contains updated provisions on excluded and excludable suppliers, and how they should be dealt with by contracting authorities.
• Key performance indicators: Requirement to publish key performance indicators, where a contracting authority must set and publish at least three KPIs. These KPIs are published every twelve months.

Overall, the Procurement Act 2023 provides for a more straightforward and transparent procurement process. In particular, it aims to support UK SME’s by ensuring smaller companies secure a larger share of the approximately £300 billion of Government expenditure per year. Further, it requires contracting authorities to assess the key barriers which face SMEs throughout the process of procurement, and to consider how best to overcome them.

M&A Implications – Private Equity

Post-COVID-19 the economy has been defined by market uncertainty, volatility, inflationary pressures and interest rate hikes. As investors have become more cautious there has been a decline in deal activity. This is particularly evident in the private equity market with total deals dropping from 205 with a total deal value of £54.9 billion in Q1 2022 to 145 with a total deal value of £18.9 billion in Q2 2023 (Pitchbook, 2023). This represents a 29% decline in the number of transactions and a 66% decline in total deal value.

Investors are looking for investment opportunities with secure and steady returns, making government contracting companies an attractive investment opportunity. Government contracts are generally long-term, offering stable revenue streams and payments are assured and timely, which provides greater certainty in relation to working capital requirements. With the passing of the Procurement Act 2023 and the increased opportunities for SMEs to access government contracts, private equity firms are likely to turn their attention to these companies.

The relationship between private equity and SME governments contractors will be mutually beneficial. Private equity firms will gain access to long-term revenue streams and opportunities to diversify their portfolio (sector opportunities include infrastructure, defence and technology). In return, SMEs will gain operational expertise and funding to compete for larger contracts.

Conclusion

The Procurement Act 2023 is largely focused on enhancing competition whilst also supporting SMEs within the UK, by providing opportunities to secure a larger proportion of government expenditure in the form of public service contracts. Due to the nature of government contracts, it is unsurprising that the companies delivering these contracts are an attractive investment for private equity. If the SME market starts to capture a greater proportion of government contracts, this will no doubt pique the interest of private equity investors.