On 24 June, the UK awoke to discover it had voted to leave the European Union.  Within hours the Prime Minister had resigned and the effects of the uncertainty were being felt within the currency exchange and stock markets.  

Whilst it is still early days and the effects of Brexit are still being judged, construction is one sector which has already been impacted.  On 4 July 2016, it was reported that the UK construction industry had suffered its worst contraction in seven years in June as the sector was rocked by uncertainty over the outcome of the Brexit vote. In this article we examine why and assess the prospects in the near term. 

This was not unexpected.  Even before the referendum, it had been reported that employers were holding back on instructing the commencement of projects.  Speaking in the Financial Times, David Noble, CEO at the Chartered Institute of Procurement & Supply, said the sector was “awash with caution and hesitancy” not seen since the pre-election lull in 2015 when speculation of a hung parliament was rife.   He added that clients were “unwilling to commit to new contracts or expand existing work.”

Funding

The European Union (EU) is one of the main sources of project funding for the construction of infrastructure and housing projects. There is a serious concern that the EU’s institutions will now be unwilling to provide funding to a member state that has resolved to leave the Union.

One of those institutions is the European Investment Bank (EIB).  In recent years, the EIB has provided around €43 billion of funding for UK projects. 

On 26 April 2016, the EIB announced its intention to invest around £1 billion in social housing schemes in the UK over a 30 year period.  EIB has also approved £580m worth of bilateral loans to four housing associations in England and Northern Ireland, including Family Mosaic (£150m); Sovereign HA (£150m); Choice Housing (£150m); and Apex Housing (£130m). Others in the pipeline include associations in England and Scotland.

The UK had also been a major beneficiary of the so-called “Juncker plan”, the European Fund for Strategic Investments (EFSI).  The EU Commission has said that while existing ESFI project commitments will be maintained, the activities of the EIB in the UK will be the subject of negotiations following activation of Article 50 of the EU Treaty. 

This spells wide-scale uncertainty for many projects with a real risk that many will need to be pulled if EU funding is ultimately withdrawn and not replaced from elsewhere. 

Labour issues

The construction industry has benefited from the free movement of labour from the other EU member states.  Many skilled and unskilled workers have opted to move here to work on construction projects.  Although many builders consider that labour costs remain too high, this addition of flexibility within the work-force has helped attenuate the effect.  

At the time of writing, HM Government has not yet activated Article 50 of the EU Treaty, the process which will formally terminate the UK’s membership of the European Union.  Once the Government gives its notification under Article 50, it will negotiate the terms of the UK’s continued relationship with the EU.  Free movement of workers will be one of the matters up for discussion.  It is currently unknown whether EU nationals resident in Britain will be allowed to stay here or face deportation.    

Developments will be watched with interest by the industry.  There is not only a concern that Brexit could push up hiring costs but also that companies could lose valued employees to the political fall-out of the referendum. 

Market access in other Member States

Businesses currently benefit from the provisions on free movement of goods, services, workers and capital in the EU, which enables them to take up opportunities within other member states.  The level of flexibility open to cross-border operations will depend very much on the terms of any free trade agreement reached between the UK and EU.  Pivotal to market access for EU opportunities are the rules on public procurement, which have required the opening up of bidding for major public contracts to the whole internal market on an equal and transparent basis.  It is not clear whether UK firms could be blocked from competing for contract opportunities in continental Europe. 

The effect of departure from the EU on foreign direct investment

There are real fears that investors may think twice about the UK as a destination, given the uncertainty over whether it will remain a member of the EU single market.  There could be a knock-on effect for the industry as a result.  Fewer external investors means reduced demand for UK properties and for the building of new commercial or residential premises.    

Environmental Legislation

The Single Environmental Assessment Directive states that environmental assessments must be carried out for specified plans and programmes.  Post-Brexit, it is unclear whether the Government will continue to require such assessments to be conducted. The issue is one of immense importance as assessments can extend the time required to complete an infrastructure project and a failure to complete one satisfactorily can lead to a legal challenge and related delay.

It is unclear whether the Government will move to repeal these measures. Whilst a degree of deregulation would be welcomed by many, it would be unpalatable to others.  Further, it would require the UK to leave international treaties, such as the Aarhus Convention, on which many of these legislative measures are based in any event. Politically that could be very difficult.

Conclusion

In our view, it is imperative that the Government moves quickly in order to address the deep concerns held by the industry.  These are undermining growth in a strategically important part of the economy and one which is essential to ensuring that the country has the infrastructure and facilities necessary to meet the needs of its population.  Prior to the referendum, assurances were given by the Leave campaign that there would be no need to remove EU citizens from the UK and that national Government could match the funding provided by EU bodies in all areas.   It would greatly assist the house-building and construction industries sectors if these words could be matched by concrete guarantees that protecting the sector will be a cornerstone of building a prosperous post-Brexit Britain.

This article was written by Paul Henty. For more information please contact Paul on +44 (0)20 7427 6506 or paul.henty@crsblaw.com