Economic Activity of Public Bodies (Overseas Matters), Second Reading, House of Commons, 3 July 2023

Key messages

• This briefing focuses on the practical impacts of the technical content of the bill, as it relates to the procurement and pensions activities of councils.
• The Bill seeks to remove the possibility for public bodies, including councils, to campaign against, boycott, seek divestment from, or sanction a particular territory internationally, unless endorsed by the Government’s own foreign policy.
• Procurement: councils are already prohibited from taking territorial issues into account when awarding public contracts. The Bill however replaces this long-standing restriction with new wording. Draft regulations published under the Procurement Bill are also seeking to change this wording.[i] Clarity is therefore needed as regards which path the government is now taking to allow councils to ring-fence public contracts to suppliers or supplies from certain territories, such as the UK.
• Pensions: the use of judicial review by “interested third parties” is concerning, given existing pressures on the court system and the lack of clarity around who or what may be deemed to be a sufficiently interested party. It is possible that there may be applications that waste pressured resources in the court system and within local authorities. It is important that there is more clarity around this point as the Bill progresses. 

Procurement

Clause 15 (1) and (2) of the Bill repeals the long-standing restriction set out in section 17(5)(e) of the Local Government Act 1988 which prevents local authorities from taking territory of origin into account in procurement decisions.[ii]

Instead, section 1 of the Bill introduces a new restriction: “The decision-maker must not have regard to a territorial consideration in a way that would cause a reasonable observer of the decision-making process to conclude that the decision was influenced by political or moral disapproval of foreign state conduct.”

LGA view:

• Awarding public contracts based on non-commercial considerations, such as the territory of the supplier or supplies has for many years not been permitted under Section 17 of the Local Government Act 1988.
• The Bill’s wording would appear to remove the need for regulations under the Procurement Bill that the government is currently consulting on in relation to Section 17 of the Local Government Act 1988. The consultation refers to section 17(5)(e), but this Bill repeals section 17(5)(e) so it is not clear what the Government’s overall policy intention is. We would seek general clarification between the two pieces of legislation.

Pensions

In part one of the Schedule, paragraph three, subsections one and two effectively exclude the pension schemes of the bodies that the Bill applies to – but it’s clear from clause 12 of the Bill that it does apply to Local Government Pension Schemes (LGPS).[iii]

Part two of the Schedule sets out exceptions for “certain types of consideration” to which the relevant provisions of the Bill (mainly section one) would not apply. The provisions in this part of the Schedule effectively permit boycotts of, or divestment from, relevant investments where the rationale for that decision includes “labour-related misconduct”, or “environmental misconduct”. This would permit LGPS funds, and other affected decision makers, to take into account considerations relating to Environmental, Social and Governance (ESG) factors when making decisions not to invest, or to divest. This is in line with established investment practice in the LGPS.

Under section five subsection six, judicial reviews (JRs) can be brought “only if the court considers that the proposed applicant has sufficient interest in the subject-matter of the proposed application”. This means that a third party can bring a case against a decision-maker but will have to demonstrate to the High Court that it has “sufficient interest in the subject matter” for the case to proceed.

LGA view:

• The Local Government Pension Scheme is a well-funded and well-run scheme, with very few Pensions Regulator or Pensions Ombudsman cases for a scheme of its size: over six million members and assets of over £360 billion.
• Administering authorities, the local authorities that are responsible for running each of the 86 LGPS funds in England and Wales, take their statutory and fiduciary duties around the investment of pension funds very seriously. They also take very seriously their duties under the Equality Act to foster good relations between different communities and to eliminate discrimination.
• Investment decisions are taken in line with the fiduciary duty – requiring LGPS funds to make prudent investment decisions based on an assessment of the financial consequence of a number of matters, including those relating to ESG factors. Where an LGPS fund decides to divest from particular investments, and those decisions are based on non-financial factors, LGPS funds follow the Law Commission’s direction that any financial impact on the fund should not be significant and that the decision would likely be supported by scheme members.
• The enforcement regime envisages broadening the Pension Regulator’s existing remit in relation to the LGPS to include decisions relating to investments. It is important that TPR does not stray beyond the remit set out in the Bill.
• The use of judicial review by “interested third parties” is concerning, given existing pressures on the court system and the lack of clarity around who or what may be deemed to be a sufficiently interested party. It is possible that there may be numerous applications that waste pressured resources in the court system and within local authorities. It is important that there is more clarity around this point as the Bill progresses.  

Contact: Elliot Gregory, Public Affairs and Campaigns Adviser:  Email: [email protected]