PPN 01/22 – Contracts with suppliers from Russia and Belarus
On 28 March 2022, the Cabinet Office published its first procurement policy note of the year. PPN 01/22 (the PPN) looks at how contracting authorities can further cut ties with suppliers from Russia and Belarus and follows recent trends of contracting authorities reviewing their contract portfolios where they are working with Russian and Belarusian based entities.
The PPN applies to all central government departments and their executive agencies and non-departmental public bodies (In-Scope Organisations) who should take action to apply the PPN to all of their contracts (i.e. contracts above and below the thresholds set out in the Public Contracts Regulations 2015) where it is 'relevant and proportionate to do so'. The PPN applies to In-Scope Organisations with immediate effect. Additionally, contracting authorities from the wider public sector are encouraged to consider applying the approach set out in the PPN to their contracts.
- Reviewing existing contracts; and
- Considering new procurement requirements.
Whilst the PPN requires In-Scope Organisations to review and consider terminating existing public contracts with Russian and Belarusian based entities, the PPN does not state that contracts must be terminated. Rather, In-Scope Organisations should take a 'proportionate and risk-based approach to reviewing their contract portfolio', with the focus on major contracts and those which could have the most impact and influence on the Russian or Belarusian regimes.
The PPN sets out the following steps to be taken:
- Review of existing contract portfolio to identify contracts where the prime contractor is a Russian or Belarusian supplier (the definition of a 'Russian or Belarusian prime contractor’ is set out below);
- Consider terminating contracts in accordance with their termination provisions where a Russian or Belarusian prime contractor is identified; and
- Only proceed to terminate where an alternative suppler can be sourced with minimal disruption to public services (and in line with value for money and affordability requirements).
For the purposes of terminating existing contracts, a ‘Russian or Belarusian prime contractor’ means an entity:
- constituted or organised under the law of Russia or Belarus; or
- registered in the UK or with substantive business operations in the UK, or another country but controlled by an entity based in Russia or Belarus (e.g. a parent company or by ‘Persons of Significant Control’).
A ‘Person of Significant Control’ is defined as holding:
- more than 25% of shares in the company; and/or
- more than 25% of voting rights in the company; and/or
- the right to appoint or remove the majority of the board of directors.
Whilst this information should have already been captured at the selection stage of the procurement process, the PPN states that further verification may be needed using various sources, including Companies House.
The PPN adds that any decisions to terminate a contract should be made on a case by case basis and within existing legal restrictions, financial allocations and budgets. For volume based contracts, the PPN suggests that where termination is not feasible, an alternative approach would be to reduce volume to zero in order to achieve the same effect.
Further guidance is provided on undertaking risk assessments, approving a decision to terminate, managing costs, and reporting and record keeping. For example, a systematic approach is recommended to assessing the risks to determine whether it is appropriate to terminate a contract, including the business criticality of the contract and the associated costs.
Although the PPN states that In-Scope Organisations may want to consider whether there are Russian/Belarusian subcontractors being relied upon to deliver the contract (provided a proportionate, risk-based approach is taken), it does not require In-Scope Organisations to ask prime contractors to consider terminating subcontracts with Russian/Belarusian subcontractors or undertake full supply chain mapping.
For new procurements, the PPN highlights that an In-Scope Organisation could decline to consider bids from suppliers who are constituted or organised under the law of Russia or Belarus (or whose Persons with Significant Control information states Russia or Belarus as the place of residency).
However, a supplier should not automatically be excluded from a new procurement where:
- it is registered in the UK (or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement); and/or
- it has significant business operations (i.e. it has a registered office, factory or other permanent base from which meaningful business operations are conducted) in the UK (or in a country the UK has a relevant international agreement with reciprocal rights of access to public procurement).
Where either of those circumstances apply, there is a risk that in automatically excluding a supplier, a contracting authority could be in breach of the requirement to treat bidders equally and without discrimination as set out in the Public Contracts Regulations 2015.
Local Government Act 1988 considerations
The PPN does not apply to contracting authorities which are subject to Section 17 of the Local Government Act 1988 (the Act). The Act prohibits certain public bodies from taking non-commercial considerations into account (including the location or country of origin of a supplier) when entering into or terminating contracts and in decision making in procurements. Schedule 2 to the Act lists the public bodies to which Section 17 applies, which includes local authorities. The PPN notes that the Department for Levelling Up, Housing and Communities is considering an amendment through secondary legislation to address this issue and may issue further guidance in due course.
The Government has published both the PPN itself and FAQs to assist contracting authorities with its implementation. For further information, our specialist procurement team can advise you further on the issues raised.