David Vayro is Head of Built Environment Projects at Primas Law. In this feature, he looks at the benefits and challenges of Brexit, and what it holds for the UK construction industry.
Since the United Kingdom formally left the European Union at midnight on 31st January, 2020 we have been in something of a forged war. The Transition Period, which comes to an end on 31 December 2020, has meant that although the United Kingdom is no longer a member of the EU, things on the ground remain very much the same.
From 1st January 2021, however, the reality of Brexit will start to bite. This is as true for the construction sector as it is for any other branch of UK PLC. As the great pan-sectoral enabler, the construction industry will have to deal both with its own direct impacts and also with the indirect effects of Brexit on all of the other sectors into which it feeds.
Change – and there will be plenty of that – is often painful and difficult. Some of the impacts will indeed be damaging, especially so as they follow hot-foot on the UK economy’s long, slow emergence from the effects of the COVID-19 pandemic.
It is important, however, not to allow those challenges to obscure the opportunities and benefits which Brexit will present to the construction sector. As those opportunities and benefits are likely to come to fruition in the medium and long term that might not be of much immediate comfort. There are benefits and opportunities nonetheless and in the short term, their latency should help bolster business confidence, the oxygen of the construction sector.
The short to medium term challenges which the construction sector will face are not to be under-estimated. As we go to press the very distinct mood music emerging from Whitehall is that the prospects of a deal are fading. For what it is worth, the UK is briefing that the EU is trying to introduce new issues into the debate. The EU is briefing on UK intransigence around, for example, Fishing Rights and its perfidy exemplified by aspects of the UK Internal Market Bill, returning for a final time to the Commons on 7 December 2020. A no-deal Brexit would result in the UK leaving the EU without a negotiated and settled Trade Agreement and falling back on World Trade Organisation rules.
So, then, in practical terms what are the key challenges for the UK construction sector in the event of a no-deal Brexit? They are to be found in relation to two of the key Freedoms embedded in the EU, those of people and of goods:
- Labour and skills
The UK construction sector has a disproportionate dependence on migrant labour from within the EU in relation to low-skilled or un-skilled work. Many higher-skilled roles are also occupied by EU Nationals although the proportions are much lower. Overall in excess of 28% of the construction industry workforce originates from EU Member States.
Access to those markets will be very much more difficult following a no-deal exit. EU Nationals will no longer be able to travel freely to and work in the UK and instead they will require Visas; social and healthcare arrangements will not be as straight forward and payment and tax regimes will have additional layers of approval and compliance requirements.
Not only will this add cost to the process, it will also increase scarcity of the resource, extend timelines for on-boarding and act as a practical deterrent. This would be coming at a time where, notwithstanding Covid-19, the construction sector of the UK economy is in its sixth straight month of growth enjoying filling order books on the back of a six-year high in the rate of increase in new orders.
The sector has (and continues to) shed labour in its overhead reduction efforts responding to COVID impacts but with business confidence at its highest (according to November’s construction PMI data) in a year, that strategy is going to come up against the rising demand referred to above and something will need to give.
The Construction Industry Training Board (CITB) recognises this in its 2020-2025 Strategy Document and has to concede that, in reality, there is no practical solution which is likely to be able to address shortages in in the near term.
There was never a point where the need for a coherent strategy which engages and has the support of all participants in the sector was so needed. The skills and labour shortage is a double-whammy. Under a no-deal Brexit there is both the immediate hit and the gradually increasing throttle on delivery as growth in demand activity far outstrips supply.
- Construction materials and equipment
In an echo of its labour profile, the UK construction sector has developed a healthy appetite for importing and exporting (64 % and 63% in 2010 respectively) construction materials and equipment.
COVID has very effectively seen to the ravaging and desiccation of the industry’s supply chains the effect being that materials lead times and scarcity are on the increase in the face of already rapidly increasing demand. Those supply chains had already evolved in large part on to “just in time” platforms taking advantage of rapid movements around the continent.
Play into that mix the additional complexities around the procurement and import of materials and equipment which a no–deal Brexit will entail and the result is a significant structural delay and additional cost. Many millions of additional Customs transactions required and queues of thousands of trucks at the UK borders with the EU (effectively France and the Republic of Ireland).
As with labour issues, that structural delay and additional cost will be overlaying the current and continuing growth trend in construction activity, exacerbating the difficulties.
Integrated and collaborative supply chains which are technologically robust will fare least worst and the rest will either be already on a fast learning and development curve or will face an almost vertical cliff face in terms of competing in a bureaucratic, administration heavy market place with costs and demand soaring away.
- Impact on quality and standards
The aftermath of a no-deal Brexit would see the effective unpicking of EU-wide harmony in terms of quality benchmarks and approved standards. It would no longer automatically be the case that European Standards and the “CE” mark would be acceptable contractually or technically.
The accumulation of similar structural delays and additional cost is the logical impact.
At this point it is worth remembering that amongst this litany of challenges, there are benefits of which the fittest and best prepared participants in the sector will be able to take advantage in the medium term. The foremost of these is the potential for root and branch reform of how government procures the practical manifestation of its policies and how it influences the private sector to follow that lead.
- Public procurement regime
A no-deal Brexit presents government with an opportunity to re-calibrate public procurement processes to become drivers for growth and development in the construction sector (and in the wider Economy). That re-calibration could also be harnessed as best practice to encourage the private sector also to adopt the practice of procurement as a policy tool.
The areas of influence are obvious and chime very closely with the increasing cut through of the sustainability agenda. Examples are:
- Levelling access for SME’s to local procurement with associated local economy benefits;
- Minimising carbon miles by local materials and equipment sourcing;
- The comprehensive greening of buildings;
- Promoting local employment and skills training;
- Elevating the relative importance of social value issues as procurement criteria; and
- Whole of Life and Lifecycle costing vs. Lowest Price tendering.
In conclusion, for the construction industry there are challenges in abundance, and the current growth trend in the construction sector notwithstanding, those challenges are going to take their toll. For the fittest and the most resilient, however, there is the hope that Brexit can be the vehicle for the order of magnitude of change in public and private procurement practice which can help ensure that a post-COVID, post-Brexit construction sector is healthy, strong and effective.
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