UK: Brexit means...?

Amidst a spectrum of bold political promises, rhetoric and catchphrases, we now know exactly what Brexit means. The recent addition of "Brexit" to the Oxford English Dictionary is very simply defined as: "The withdrawal of the United Kingdom from the European Union". Yet, aside from its honorary inclusion into the English language, as Edward Colclough explains, much still remains uncertain about Brexit and its implications for the UK construction industry.

Following the UK's vote to leave the EU on 23 June 2016, by a slim majority of 51.9% to 48.1%, in March this year the UK Government formally triggered Article 50. In doing so, it commenced a two-year negotiation period to implement what is meant by Brexit. With the pressure of a two-year deadline to negotiate a divorce settlement with the EU under way, this June saw a Brexit-induced snap general election. The outcome, a result the pollsters miscalculated almost as much as the Brexit vote just 12 months before, a hung parliament. With no political party able to secure a clear majority to govern, the UK Government's hand at the Brussels' negotiation table has been weakened and further uncertainty cast on what Brexit will ultimately mean for the UK.

Responding in a keynote speech in Florence this September, the Prime Minister, Theresa May, put forward a proposal to postpone a full Brexit until 2021 by asking the EU member states to agree to an additional two-year transition period. During such a transition period the UK will have left the EU, but only in name. All UK payments into the EU budget, the free movement of people and the jurisdiction of the European Court of Justice would continue whilst more time is given to implement a Brexit deal. What is clear is that any certainty over Brexit will not be known in the immediate future. In the words of the "European Council (Art. 50) guidelines for Brexit negotiations", "nothing is agreed until everything is agreed".

When uncertainty is the only certainty

With UK PLC now calling for confidence to be instilled into a turbulent and uncertain market, attempts to predict the true impact of Brexit on the UK construction industry remain the subject of speculation and crystal ball gazing. This is unfortunate as the construction industry builds on certainty and market confidence.

Although little has changed in terms of day-to-day policy since the Referendum vote (with some still seeking to prevent a Brexit from happening at all), the political uncertainty of Brexit is very much taking its toll. Following a positive start in Q1 of 2017 there has been a deceleration in growth since June's election, with private, commercial and industrial sectors seeing the most significant reduction in output.

The UK property market, a traditional prop to the construction industry, has itself been a casualty of the Brexit vote, with developers now tempering construction plans and taking longer to commit to new projects in order to reduce their market exposure and mitigate widespread concerns that companies may rent less space or simply relocate from the UK altogether. Doubts are also surfacing over the Government's commitment to building one million new homes this Parliament due to Brexit uncertainty, a jittery home buyers' market together with stamp duty and pending interest rate hikes. On the back of a weakened pound, funders are also tightening their lending criteria making it more difficult to secure finance for new projects. With the construction sector now seen to be flirting with a recession, in the eye of this perfect storm is the political uncertainty surrounding Brexit. The Business, Energy and Industrial Strategy Committee provided some comfort to business in its recently launched inquiry into the implications of Brexit, which seeks to establish how the interests of different sectors should best be pursued in both the negotiating process and post-Brexit. In doing so, the Committee will examine a range of key issues relating to market access, non-tariff barriers, regulation, skills, R&D, trade opportunities and transitional arrangements. The major concern for construction is that it did not even make the cut of sectors within the remit of the inquiry – with only the nuclear, automotive, processed food and drink, aerospace and pharmaceuticals sectors on the Committee's agenda. It is increasingly clear that the construction industry will have to take the initiative itself to get its points of view across and onto the Brexit agenda.

For an industry that has been reliant on the EU for investment, labour and materials, the following section identifies some key areas of uncertainty to be addressed in the Brexit negotiations:

Workforce

Free movement of labour has been one of the most valuable assets of EU membership for the UK construction industry. So much so that the use of EU labour has managed to paper over the cracks of a sustained lack of skilled UK labour, an ageing workforce and a failure to invest in training and development to encourage the best home-grown talent into construction. This is perhaps the biggest obstacle Brexit creates for the industry.

RICS has already identified the UK's skill shortage as the primary risk to jeopardising a predicted £500 billion pipeline of projects, on the basis that there are not enough British workers to meet even the current demands of the industry. With 194,000 EU workers currently working in the UK construction sector we are utilising an EU workforce large enough to deliver 16 Crossrail projects. It is further expected that 430,000 domestic workers will have retired between 2010 and 2020, meaning the industry will need to find the next generation of workers to plug this gap. Until a solution is found to enable workforce supply to meet the demand of the construction sector, labour costs will continue to increase and impact on the competitiveness of projects.

Materials

Following the pound's depreciation since the EU Referendum, one of the strongest cost pressures on the construction industry has been the rising prices of imported materials. With 64% of construction materials used in the UK being imported from the EU, any loss of tariff-free access to the single market will only increase the cost of resources and the profitability of projects until adequate trade agreements are negotiated and put in place. In contrast 63% of construction materials exported from the UK go to the EU and have the potential to be exposed to heavy duties. Comfort needs to be provided in relation to the accessibility and affordability of construction materials in a post-Brexit construction industry, as this is a substantial pricing risk that investors, employers and contractors will all look to avoid.

EU procurement/red tape

A common criticism of the EU from the construction sector was the perception of extensive red tape and convoluted procurement regulations which resulted in inefficiencies due to the cost of bureaucracy. While Brexit may appear to offer the opportunity to streamline the existing EU requirements with a more flexible approach, the Government's White Paper, The Great Repeal Bill, seems to suggest it will be business as usual on this front. The White Paper indicates that the Government will seek to convert directly applicable EU law into UK law. In the long term the extent to which the current law is rewritten is likely to depend on the nature of the Brexit deal the UK gets.

Funding

The UK has been one of the biggest net beneficiaries of EU funding from the likes of the European Structural Investment Fund and the European Regional Development Fund. While leaving the EU will close the door on such investments pools, which have supported projects such as Crossrail and HS2, it opens up the potential for foreign investment opportunities. Investors will be paying careful attention to the health of the UK construction industry over the coming months, meaning the sector must be able to sell itself as a collaborative and successful investment choice. While foreign investors will be cautious of the uncertainty surrounding Brexit, the weak pound has been able to maintain the UK as an attractive investment opportunity. It is essential that the Government, and the sector itself, is able to maintain the UK construction sector as a good investment opportunity on a global stage.

Brexit-proof contracts

A key purpose of construction and engineering contracts is to allocate risk between the parties throughout the duration of a project. While contracts have inbuilt mechanisms for addressing changes in law, taxes, labour supply, the costs and/ or availability of materials and acts of force majeure, the problem with Brexit is that it stacks so much uncertainty against these items. The major concern is that these are all risks which are becoming increasingly difficult for parties to predict, manage or price against. In a culture of fixed price lump sum contracts, where these risks are typically thrown down to the contractor, this approach will most likely have to change.

What happens next?

By general consensus the construction sector favoured the "remain" vote. Brexit, however, as defined by the Oxford English Dictionary, is not in itself a bad thing for the industry. Whether Brexit proves to be good or bad for the construction industry will be dictated by the terms of any Brexit deal and the construction industry's ability to capitalise and adapt to the changes it faces. Although uncertainty has the potential to hinder the industry in the short term, the construction sector has a golden opportunity to market itself post-Brexit to a global audience. In doing so it must set out in no uncertain terms what it requires a prosperous post-Brexit construction sector to look like. Once it has done this, it will then be over to the Brexit negotiators to deliver.


This article is taken from Fenwick Elliott's 2017/2018 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2017/2018.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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