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02 October 2018

Brexit and Infrastructure

With Brexit dominating the last two and a half years and the UK’s scheduled departure only 6 months away, it would be good to hear from the political parties on their proposals for the UK’s long-term national priorities in infrastructure, and how they plan to deal with some of the potential impacts of Brexit on the construction industry, who will have an obvious strategic role.

To give some context, over the next 10 years the UK will see the implementation HS2, Crossrail, a third runway at Heathrow, Hinkley Point C (not to mention continued decommissioning at our legacy nuclear sites) and the Thames Tideway Tunnel. These are just the mega projects amongst the £600 billion of public and private investment in UK infrastructure over the same period. This does not even take into account issues such as digital infrastructure or future mobility issues such as autonomous vehicles.

Potential Skills Shortage and Productivity

One impact of the 2008 financial crisis on the construction industry was the reduced numbers of graduates/apprentices/trades joining the industry (understandable at the time). This has led to a general skills shortage, an ageing workforce, with the gap filled by migrant EU workers (RICS data shows that 8% of all construction workers in the UK in 2017 were EU Nationals).

To compound matters, productivity in the construction sector is far lower than the UK average and was reported by McKinsey in 2014 to be costing the sector more than £15bn a year. Whilst there is agreement between the UK and EU that during the transition period, there will (in effect) be guaranteed freedom of movement for EU nationals until 2020, which may alleviate the short-term issues with the supply of labour, it does not solve the medium to long-term issues with the skills shortage and it will be interesting to hear from the parties as to how they will resolve these issues.

For example, whether there are any plans to adapt the Apprenticeship Levy to encourage and promote a greater number of higher and better skilled workers.

In June 2018, the Federation of Master Builders called for an urgent review of the scheme quoting figures that there was a 28% fall in apprenticeship starts between August 2017 and March 2018. FMB’s Chief Executive suggested that as there is a far greater proportion of construction workers employed by sub-contractors lower down the supply chain or even agency workers; larger firms should be permitted to pass on a greater proportion of their Levy funds (currently 10%) onto their supply chain.

The industry has also been calling out for the conclusion and acceptance of the apprenticeship standards by which all apprentices across the industry are to be trained. As at the beginning of this year only 27 of the 75 standards had been approved, despite the process beginning in 2014.

Increasing the number of skilled personnel in the construction industry is unlikely by itself to close the gap in productivity and as several of my colleagues have commented previously (in the following URLs:)

(www.charlesrussellspeechlys.com/globalassets/pdfs/sectors/construction--infrastructure/construct.law_summer-2018.pdf)
(
www.telegraph.co.uk/business/2018/07/11/time-construction-build-digitised-future/amp/)

There will be a need for the industry to invest, develop and adopt new technologies that drive productivity. As well as addressing skills shortage, these new technologies can help improve health and safety on worksites, increase efficiency as well as reduce the industry’s carbon footprint.

As the biggest procurer of construction services, the Government has sought to use its buying power to drive such efficiencies by announcing in the November 2017 Budget statement that it will prioritise the use of offsite manufacturing on all publicly funded projects from 2019.

The Government has also announced the £170m investment in innovation and productivity through the Industrial Strategy Challenge Fund for research into new construction processes and techniques."

Whilst these policies may be welcomed by the industry it will be interesting to hear from all political parties on their approach to these issues and commitment to such policies despite the outcomes of Brexit. 

Procurement

Membership of the EU allowed for free movement of goods within the EU without duties and other restrictions such as rules of origin checks. As a result, cross-EU supply chains have developed and UK companies have the advantage of a deep market for specialist products, raw materials, construction technology and specialist machinery. In February 2018 the Government reported that 62% of all imported construction materials came from the EU.

Although the UK and EU are aiming for a deal that maintains tariff-free trade, there is uncertainty within the industry and this can lead to price fluctuations and suppliers pricing in risk for currency fluctuations."

Given that major infrastructure projects are delivered over decades and the criticality of construction and infrastructure to the overall UK economy, it will be interesting to hear whether there are any clearer messages and policies from the various parties over the coming days on how they intend to deal with tariffs on construction-related materials and products.

Investment

Through the European Investment Bank, the UK’s construction sector has benefited from long-term loans at attractive interest rates to enable a wide range of projects from new transport, water and energy schemes, to schools and hospitals as well as major projects such as Crossrail and the Thames Tideway’s ‘super sewer’. Between 2012 and 2016, the EIB financed £31.3bn of public infrastructure projects in the UK in 2016.

However, post-Brexit, the UK and projects located in the UK will no longer be eligible for EIB financing.

Many industry bodies and individual companies have called for the UK Government to implement policies designed to protect and encourage the investment in UK infrastructure. For example, the Institution of Civil Engineers has recently suggested that the Government adopts a UK Guarantees Scheme to underpin a privately owned and financed bank, supported in a similar way to the German investment bank KfW, with a similar mission to the EIB. Without adequate and affordable financing, the UK’s infrastructure projects may well stall or simply be shelved and we await clear guidance from the all political parties on their proposals for ensuring the delivery of the projects listed on the National Infrastructure Pipeline.


This article was written by Michael O'Connor. For more information please get in touch via: michael.o'connor@crsblaw.com or +44 (0)20 7427 6441

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