UK Infrastructure: A Year in Review

Andrew Barker is Director of Dalcour Maclaren. In this feature he takes a look at the rollercoaster year construction had in 2020.

The end of 2020 is nigh! For reasons I need not explain, it has become famed as the ‘year to forget’ right across the globe.  Mentally, we are so desperate for 2021 to be a clean slate; we all want to be positive and hope that vaccines early next year will start the ‘post-covid’ era.  And let’s hope it is an era to celebrate!

But when you look back at the 2020 rollercoaster, it is not all doom and gloom across the infrastructure sector.  Yes, there have been some knock-backs and hurdles, but there has also been a fair share of progress.  Clearly the sector is vast, and the activity is widespread, but here are the highlights in my calendar based on what we, at Dalcour Maclaren, have been working on:

January – Hornsea One Offshore Wind Farm was declared fully operational and took the prize for the World’s Largest Offshore Wind Farm with a generating capacity exceeding 1GW for the first time.

February – UK Government approved the £106bn HS2 Project.

March – On 11^th March, the government promised “the biggest programme of public investment ever” as part of its Budget for 2020, with planned investment in roads, railways, affordable housing, and broadband.

Just 7 working days later, on 23^rd March, the PM announced the UK wide Lockdown; and it arrived with a brutal thump.  Heathrow’s Third Runway and Gatwick’s Runways Extension Projects were both halted as Covid tore up their short-term plans.

April – Covid started impacting on Public Inquiries and Hearings as DCO programmes start to slip and increasing numbers of projects suffered delays.

May – Sizewell C Nuclear Power Station DCO application was submitted.

June – Crown Estate Scotland announced the launch of ScotWind Leasing, the first round of offshore wind leasing in Scottish Waters for a decade with the potential to deliver up to 10GW of total generating capacity.

July – Norfolk Vanguard Offshore Wind Farm DCO is granted allowing the development of 1.8GW of energy off the Norfolk coast.

August – following a window of hope in the Covid statistics in July, we all try to find a quiet little corner of England for a short respite from our home offices!

September – HS2 formally started construction as the main civil engineering contractors launched the first ‘shovels in the ground’.  (Previous works focussed on preparatory work including design, ground clearance and demolition).

October – Wylfa Newydd nuclear power station DCO decision is delayed for a third time.

November – Boris launches a ‘Green Industrial Revolution’ with his 10 Point Plan, closely followed by the National Infrastructure Strategy and then Rishi Sunak’s Spending Review where Infrastructure is put in pole position.

December – could be an interesting month!  2020 has seen 17 Nationally Significant Infrastructure Projects having their DCO’s granted with 6 further DCO decisions pending, some of which are long awaited but due by the end of the month.

Whilst 2020 has had its challenges, and I sympathise enormously for those working in sectors that have suffered the most, there are now vast opportunities out there.  Boris is starting to set the direction; ‘building back greener and better’ is the headline and the National Infrastructure Strategy is a start to putting the meat onto the bones and providing the certainty that investors require to fill a funding gap which will require more than a little Polyfilla!

Our Prime Minister is hosting the 26^th UN Climate Change Conference of the Parties (COP26) in Glasgow in November 2021. The climate talks will bring together heads of state, climate experts and campaigners to agree coordinated action to tackle climate change.  The UK needs to have clear plans in place well before then if we are to shine on the national stage and stand a strong chance of reversing the economic damage of 2020.

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Just When Business Thought it Couldn’t get Worse

Ongoing Brexit negotiations and a second national lockdown have added to the economic uncertainty many business owners are currently experiencing. With the recent Office of Tax Simplification (OTS) report doing little to lighten the mood, Simon Hughes, partner at leading law firm Taylor Walton, says owners should exercise caution before selling their business.

The report, the first to consider Capital Gains Tax (CGT) specifically, was undertaken in response to the Chancellor’s request ‘to identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.’

In other words, the Government is looking for new sources of tax revenue to replace the billions expended on addressing the coronavirus pandemic and its impact on the UK’s economy. In the current political climate, targeting wealth creators is probably a vote winner, so be warned.

Tax grab to pay the COVID bill?

The OTS report makes suggestions that will fundamentally change the capital gains tax rules in the UK if adopted and any outcry proves no deterrent. One suggestion is to align CGT rates with income tax rates, which will significantly increase the tax paid when a business is sold.

There have already been mutterings from within Government that the money to pay the COVID-19 bill will have to come from somewhere and it’s unlikely to be another round of austerity, so we have to accept CGT rates will probably increase in the new year.

The news is another blow to those business owners considering a sale, having only just recovered from the reduction in March of the entrepreneurs’ relief (now Business Asset Disposal Relief) limit from £10 million to £1 million, with any balance of CGT payable at a rate of 20%.

If as suggested in the OTS report the rates are aligned in the Budget, this 20% rate would be increased to 45% and owners will pay a huge increase in tax following the sale of their business.

Keep calm and sell wisely?

Whilst the uncertainty around Brexit remains and the economic impact of the pandemic is expected to extend into 2021 and beyond, it may not be the easiest time to sell a business, but for those ready to sell, there remains a window for still extracting maximum personal reward from any deal.

There are many considerations for any owner wishing to sell, but if you are already in discussions with a potential buyer, it’s important at an early stage to require them to execute a Non-disclosure Agreement.

You should then only proceed to full legal documents once the prospective transaction is well-described in a ‘heads of terms’ agreement.

If you are trying to sell now before the potential hike in CGT, it’s critical to get the advice of experienced corporate lawyers who will ensure that as the seller you do not make easy or unnecessary concessions early on in the ‘heads of terms’ before the deal becomes binding.

With the right advice at an early stage, there is more likelihood of being able to get the buyer to commit to key points crucial in maximising the value you can generate, which might include:

• Cash at Completion: this maximises the up-front payment made to you and minimises any extended earn-out;
• Security for deferred payments: if any payments are to be deferred, it is important to establish what security the buyer can offer;
• Clarifying what the price really means: it is also crucial from the outset to properly describe the interdependence of price i.e., whether it assumes a cash-free, debt-free asset and whether a target level of working capital is required;
• Locked box vs Completion Accounts: proposing a Locked Box structure instead of completion accounts. This generally favours the seller by accelerating any asset-value disputes to a point, before signing the share purchase agreement, when you have more bargaining power, rather than after completion when the buyer arguably has greater leverage;
• Liability limitations: establishing the level of financial-based and the duration of time-based limits on the seller’s warranty liability;
• Buyer’s ability to fund: establishing whether the buyer requires third-party financing to complete the deal and whether that introduces greater uncertainty to the prospect of a deal;
• Timetable: setting timetable expectations and limits on any exclusivity period

These are just a few considerations and a conversation with an experienced corporate law team is likely to throw up a host more, but the key thing is to seek advice early in the process, long before you mention to anyone the possibility of selling your business.

If you hope to sell your business before any rise in CGT is announced next year, a law team will talk you through the process and explain what is possible in the time available to ensure you extract the maximum value from the sale, whilst making the process as painless as possible.

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Firm Gears up Waste Management Wake Up

adi Group has set its sights on transforming the UK’s approach to waste management in 2021. The group has been bolstered in expanding its presence, after it was revealed that a local authority in North West England has bought into its innovative concept of underground waste systems.

The new framework agreement will give all publicly funded organisations access to acquire the unique waste solution.

adi Group and its Waste Systems division is the UK and Ireland distributor of innovative underground containers from Sotkon. These containers present a smart, sustainable 21st century approach to waste management with the Sotkon containers aiming to paint an altogether sightlier alternative landscape to the thousands of wheelie bins which line the country’s streets.

Operating via a smart data system, the bins – which come in sleek, multi-coloured designs – send municipal waste underground into large capacity containers, improving on traditional domestic and street bin systems by eliminating unsightly overflows or overspilled waste.

For Mark Burgess, Managing Director of adi Waste Systems, the bins present a massive opportunity to transform a sorely outdated aspect of the UK’s sustainability focus:

“It’s simply astonishing that the UK hasn’t clocked on to the benefits of underground waste systems as yet.

“We all know the picture: unsightly commercial wheelie bins in city centres, overfilled with rubbish spilling out before collection day – this is a scenario that really shouldn’t be happening in today’s modern landscape.

“When you go on holiday in Europe, I know I for one am always impressed generally on how clean and aesthetically pleasing the city centre pavements are.

“That’s because popular destinations like Portugal, Spain and France have widely bought into and are utilising the underground waste concept, keeping city streets clean despite the thousands of tourists and residents that use them every summer.

“It’s high time the UK woke up to this and realised the smart benefits in going green with underground waste containers.”

Sotkon has already installed more than 36,000 of its large capacity 3m³ and 5m³ containers throughout Europe. By utilising smart tags and fill sensors, the system is able to notify responding waste management organisations when they are full. Usage data can be captured at the point of collection, and logistic systems communicated with to determine optimum routing, so that carbon footprint and emission reduction benefits are realised.

In the UK, adi Waste Systems already has over 450 units installed or planned in the near future at the University of Cambridge.

And with adi’s underground systems set to be adopted and expand more widely across the UK with the solution’s green and cost-reducing concept, Burgess heads into 2021 with a positive outlook:

“What we’re doing is highlighting how forward-thinking city authorities, just like the pending ground-breaking framework agreement in the North West, can really set a precedent across the UK for a positive and effective change on how to manage waste into the next decade,” he added.

“Local authorities, planners, architects and construction development organisations – these are the types of people that can plan cities of the future with these systems in mind, so that their sustainability initiatives are covered in all aspects, as well as looking at the more widely publicised concepts like electric vehicle charge points and such like.”

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Mixed industry outlook for architects

Just under a third of architects (31.1%) consider the outlook for the industry over the next three to six months to be challenging, with a further 3.9% responding that it was bleak. A slightly larger proportion, however, (36.7%) had a more positive outlook overall, considering the coming three to six months as either positive or very positive. 28.2% considered it to be steady.

These are the latest findings from SpecifiedBy, the specification-led marketing and product data specialist, as part of its first ever industry barometer. It will test the temperature of the industry and provide regular insight into market perceptions. The barometer leverages responses from what is the largest network of architects, specifiers and product manufacturers in the UK. New figures will be released to identify trends and address topical industry issues.

Positivity was highest among architecture firms with operations in the residential sector, although only with a slightly higher rate of respondents selecting either a positive or a very positive outlook for the next three to six months (35.3%) compared to those that saw it as challenging or bleak (34.9%). Architect firms with operations in the commercial sector came next with 34.4% of respondents selecting either positive or very positive, but 1.8% less than those that saw it as challenging or bleak.

The short-term outlook for firms with operations in the transport sector saw 19.7% more negative responses than positive. This was followed by leisure (14.2%), environment (11.9%) and civic and community (11.3%).

Although just a small proportion, the most bleak outlook was recorded by firm that have operations in the retail sector, with 4.7% of respondents selecting this option. The most positive outlook came from firms with operations in the hospitality sector, as 12.3% registered a very positive outlook, representing contrasting views from two sectors that, in general, have faced difficult lockdowns.

What are the top concerns for architects in this climate?

Unsurprisingly, the impact of ongoing COVID restrictions dominated concerns. These were split between the impact of the virus on business prospects (55.3%), working conditions, such as the need to work from home or the threat of increased employee sickness (41.7%), and supply chain disruption (37.0%).

The recession followed closely as a chief concern for 53.5% of the architects surveyed. With these factors creating an uncertain future, certainly in the short term, meeting annual targets was noted as a concern by only a fifth of those surveyed (19.6%). Keeping staff in jobs, on the other hand, was considered much more important with 35.0% responding that this was a concern that shaped their outlook for the next three to six months.

Other important issues for the industry received less cause for concern. New safety regulations are a concern for just 13.8% of architects, while digital transformation was cited by 11.2% and carbon neutral goals 10.2%.

Commenting on the findings, SpecifiedBy’s CEO, Darren Lester, said: “While the balance is fairly even, it’s still good to see that, overall, there are more architect firms with a positive outlook for the coming months than there are otherwise, demonstrating a buoyancy in the industry. We expect that this positivity will have increased too with promising talk of a new vaccine.

“Being able to operate digitally, whether sourcing and comparing products or attending CPDs online, has certainly helped our industry to weather the storm. While lots of industries are looking at digital transformation as something new, however, the truth is that architects and specifiers are already online and have been for some time – digitalised processes are more a way of life than a transformation.”

Opportunities for newly qualified architects

With economic conditions proving to be extremely challenging, the appetite for making new hires in the next three to six months is low. 40.9% of those surveyed responded that they intend to make no new hires in this period.

There was hope, however, for the next generation of architects. Almost a third of respondents (29.7%) said that they intended to invest in talent of the future by hiring either graduates or those with 2-5 years’ experience during this period, much more than any other experience category. This also represented 77.5% of all planned new hires.

Darren Lester commented: “The industry’s appetite for hiring graduates or those starting out in their career is incredibly reassuring. Our research gives hope not just to budding architects who, like millions of other graduates right now are facing one of the toughest job markets in decades, but also to the wider economy and ancillary trades the architecture industry supports.”

Competency testing

An area that gave rise to a lot of debate came when the architects were asked about new competency testing.

Two thirds of those surveyed stated that they did agree with the announced increase in mandatory competency testing (64%). Many noted that competency tests were important for evolving knowledge and keeping up to date with industry standards, especially in the light of Grenfell. Others suggested that the competency tests were not an adequate reflection of the professional proficiencies achieved in practice, and so were ‘a waste of time’.

41% of the architects surveyed felt that the RIBA was not the right organisation to be policing competency tests. Several respondents noted that ‘testing should be by an independent body’, with ARB mentioned on numerous occasions, as ‘not all architects are RIBA members’. One user wrote that ‘there should be a clear distinction between the licensing entity and any professional entity. RIBA can administer ARB’s requirements.’ Comments in support of RIBA included that they are ‘well positioned to monitor standards of professional practice’ and that they were ‘doing the right thing’.

On this issue, Darren commented: “It is clear from the split of opinion that there needs to be an approach to training and development that works for the whole industry, not just a portion.  Ultimately this needs to be of benefit to practitioners in their daily professional lives too. The positive take is that there are so many opportunities to engage in CPD programmes, not only from the various industry bodies but also directly with manufacturers. These are increasingly accessible through online learning too, making them more time efficient. Providing this choice and accessibility is the best way forward, and anything defined as mandatory should uphold this level of flexibility.”

The SpecifiedBy Architects Industry Barometer surveyed 903 architects.

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Brexit Challenges and Opportunities for Construction

Emlyn Hudson is a partner and national head of construction at Gateley Legal.  He deals with a full range of complex construction and surety work. In this feature, he takes a look at the challenges and opportunities the UK construction industry may face when it leaves the EU.

A construction project depends on a number of parties coming together to deliver the finished result.  Without doubt, Brexit will put additional pressure on these parties and any slippage on time, cost or quality could give rise to potential disputes.  There is also concern that Brexit could stretch companies’ cash flow to breaking point, in what is already a challenging market. It is therefore important to be proactive in assessing the implications that Brexit could have on a particular project and what contractual safeguards can be used to mitigate these effects.

Most standard form contracts have a change of law mechanism within them.  JCT Design and Build 2016 entitles the Contractor to a Change for any variation to Statutory Requirements after the Base Date that necessitates an alteration or modification to the Works. NEC4 ECC has the optional secondary clause X2 which allows the Contractor to claim a compensation event for a change in law.  In respect of any claim, there is always an obligation on the Contractor to notify these changes in accordance with the contract, and most importantly to mitigate their loss.  As such, it is important for Contractors to be proactive in managing these risks upfront and doing what they can to work around these changes.

Fluctuation provisions may also assist a Contractor in making a claim for additional monies. JCT Design and Build 2016 contains options for fluctuations, that apply if selected in the Contract Data.  If these provisions are included, this may allow the Contractor to recover increased levies, taxes or costs that are imposed.  NEC ECC allows price adjustments for inflation through the optional secondary clause X1.

The difficulty with these existing contractual mechanisms is that they do not fully address all of the risks that may potentially arise from Brexit (and are not always agreed to by the Employer).  A lot of the effects of Brexit are indirect, such as a shortage of labour and the potential for this to give rise to delay and additional labour costs.  This would not necessarily be caught by a change of law provision.  Similarly, Brexit may lead to the lack of availability of key products and delay at border checks, which would not be covered by a fluctuation provision.

Due to the potentially widescale implications of Brexit, it is common for Contractors to seek a “Brexit clause”, to address their specific concerns.  There is no standard wording in relation to this in the marketplace.  Much depends on the particular risks within the project, its commercial implications and also the bargaining powers of each party.  The difficulty with Brexit is that the practical implications are still uncertain and neither party wants to take the risk of something that they cannot control or predict.

As such, a range of possible approaches have emerged in negotiations. Some parties may agree to an extension of time for Brexit-related delays; or there could be a trigger event that could give rise to a right for either party to renegotiate key terms.  If the project is dependent on tight timescales or a specific product, there may even be a right to terminate arising from specific events.  This is important, as it is considered that the common law rights of frustration and force majeure will not be available for events directly arising from Brexit.  All these matters are likely to be hotly debated in negotiation and will not always be possible to agree upon.

It is prudent for Contractors to consider what other options are available to them in addition to their negotiation of key legal terms. Contractors should consider factoring additional time to their programmes and including any charges, taxes, quotas and tariffs in their tenders and pricings.  This requires careful due diligence from Contractors when scoping their work on projects. Also, Contractors are probably better placed in contractual negotiations if they can expressly identify upfront what their key risks are.  This allows them to be discussed and addressed in a more measured way within negotiations, before they arise in practice.  It is also more important than ever for Contractors to proactively manage changes, so that they do not escalate into disputes.  The parties are well advised to establish key points of contact to resolve or take action on issues rather than allow them to build up.

There are challenging times ahead and the uncertainties arising from Brexit will no doubt continue until new processes have been established and working practices have adapted.  The resilience of the UK construction market is yet again being tested but has shown its capability to adapt in the past and no doubt will continue to do so.

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Work Begins on Converter Station

National Grid’s Viking Link has started construction work on its UK convertor station at Bicker Fen, Lincolnshire with Siemens Energy.

This represents a significant step in the UK’s journey to become Net Carbon Zero, with Siemens Energy as lead contractor for the 1400 megawatt interconnector. They will supply the technology to enable the direct sharing of clean electricity between the UK and Denmark for the very first time.

A converter station will convert electricity via Alternating Current (AC) and Direct Current (DC). AC is used in each country’s transmission system, while DC is used for sending electricity long distances along the subsea cables. An identical converter station will be constructed at the other end of the interconnector, in Denmark.

The converter station will be 300m², the equivalent of around 12 football pitches. It will house state-of-the-art High Voltage Direct Current (HVDC) PLUS technology, which enables the export and import of energy through the 765-kilometer subsea and underground cable to and from Denmark.

In July this year, the UK side of work started to build a new access road and bridge over the Hammond Beck waterway. This new permanent infrastructure will enable access for major construction equipment to get to the convertor station and for operational vehicles to access the site once the converter station is completed in 2023, reducing traffic through Bicker Village.

There are around 60 people working on the site, all following Government and industry guidance for COVID-19 management. Measures which have been introduced include temperature checks, enhanced PPE (personal protective equipment), hand sanitiser stations across the site, regular cleaning as well as strict social distancing.

Mark Pilling, Head of Transmission Solutions, Siemens Energy UK&I said: “Viking Link will play a vital role in the UK’s future energy system allowing the transmission of power with Denmark. This will enable further decarbonisation of the UK’s electricity supplies and help reach net zero. This next stage of construction will see the heart of the project begin to take shape, with the converter station housing the equipment needed to transmit this power safely and efficiently.”

The start of construction of the station in Lincolnshire is a major milestone for the project as it will play a key role in connecting the British and Danish electricity systems. By connecting the two countries grids, Viking Link will make sure there is a secure, sustainable, and affordable supply of electricity for customers in the UK and Denmark.

Viking Link project is a joint venture between National Grid Ventures, part of National Grid, and the Danish electricity system owner and operator, Energinet. The 1.4 GW high voltage electricity interconnector will be the longest in the world when completed, stretching 765km subsea and onshore connecting from Bicker Fen in Lincolnshire, UK and Revsing in South Jutland, Denmark to enable clean energy to be shared.

Both converter stations will use HVDC PLUS voltage-sourced converters in a modular multilevel converter arrangement (VSC-MMC) which combines the advantages of HVDC transmission with extra benefits like AC voltage control, black-start capability, and other functions that improve the performance and network stability of both connected AC networks.

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Looking to the Future of Construction

Marco Verdonkschot is Managing Director at IronmongeryDirect,  the UK’s largest supplier of specialist ironmongery, here he reviews the construction industry in 2020 and looks ahead to next year.

2020 has been a year like no other, with every area of life facing incredible challenges and disruption. The construction industry is certainly no exception to that and has had to deal with unprecedented levels of cuts and job losses. However, it is ending the year strongly, so there is certainly hope for a full recovery in 2021.

The pandemic has hit the industry hard, with the lockdown causing construction output to plummet. In April, it fell by a staggering 40.2% – the highest monthly fall since such records began in 2010. However, since that drastic fall, output has increased every month. Between May and June, it grew by 23.5%, which was also a record.

While output remains down year-on-year, in September, it was only 1.8% below that in March, when restrictions were first put in place. In fact, output in certain sectors, such as Repair and Maintenance, Private Housing and Infrastructure, have already recovered to March levels, which is great to see.

As the situation has improved, the average number of hours worked has risen, which is a really healthy sign. Between July and September, the typical construction employee worked 30.7 hours a week. Since the start of lockdown, when this figure dropped as low as 26.6, it has risen continuously. This has led to rises in weekly earnings, from a low of £577 in April, to £642 in September.

With increases in the amount of new work, it’s not surprising that construction firms are starting to hire again. Between August and October, there were 27,000 job vacancies across the UK, which is nearly 240% more than between April and June, when there were just 8,000 spots available.

During the more difficult months, lots of construction companies took advantage of the government’s Job Retention Scheme. The latest data shows that £3.5 billion of claims have been made so far. With the Chancellor extending the scheme until March 2021, many will continue to rely on it, but the number has been falling rapidly since April, when over 720,000 construction workers were furloughed. In August, there were just over 185,000 people being supported by the government, which is 74% less than when it peaked.

One interesting result of the pandemic is a slight increase in the number of self-employed workers in the industry. Many people decided to set up on their own after being made redundant or realising they wanted a fresh start. The number of individuals registered as self-employed in both the construction of buildings sector and specialised construction activities rose between March and June this year, by 1,000 and 6,000 respectively.

The vast majority of these new self-employed workers are women, with an increase of 10,000 across these two areas. In contrast, there were 2,000 fewer men registered as self-employed in these sectors in June than in March, so it is definitely female construction workers leading the charge in this space.

Overall, after a really difficult year, there are definite signs of recovery, with output and job vacancies increasing, and the number of furloughed workers dropping considerably. While the rate of recovery will inevitably slow after record growth, hopefully it won’t be long before we are back at pre-lockdown levels.”

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