Blog: What Does the Brexit Deal Do for UK Construction? – Lexology

The final nail in the coffin of Christmas 2020 for me was getting a directive from NHS Test and Trace to self-isolate on the 23rd. So, instead of celebrating Christmas, I packed the missus off to her mother’s and settled down to read the snappily-titled “Trade And Cooperation Agreement Between The European Union And The European Atomic Energy Community, Of The One Part, And The United Kingdom Of Great Britain And Northern Ireland, Of The Other Part”. Otherwise known to you and me as the Brexit Deal.

The Deal Itself

And what a riveting read it is. In fact, possibly the most interesting thing about is that it manages to take up 1,246 pages saying…surprisingly little, actually.

Mr Johnson is fond of borrowing a Churchillian quote or two, and reading the Brexit deal reminded me of one of the great man’s best lines:

This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

I say this because the Brexit deal is essentially a collection of intentions, principles and goals. It isn’t (and, obviously, would never have been) legally binding either on the UK government or on ordinary people. In order to give effect to the Brexit deal, the government will have to introduce a considerable amount of legislation in a number of areas. And there are some aspects of it – not least the trade barrier between Northern Ireland and the rest of the UK – that have the look of a temporary solution.

In any case, giving effect to this deal will take considerable time. Churchill dropped the above line after the Allies destroyed Rommel’s tank divisions in Egypt at the Battle of El Alamein, and it still took three years to finally defeat the Nazis. For Brexit I doubt it will be anything like as quick – and along the way there may well be legal challenges and confrontations between the UK and the EU as both sides start to implement this deal.

So the final Brexit picture won’t be known for some time. However, in the meantime we can have a look at what the deal means for the UK construction industry.

Human Resources

If there has been one consistent thread in the construction industry in the last decade or so it has been the constant concerns about skills shortages in the UK.

In this respect the Brexit deal comes at a difficult time for the industry anyway; recent figures from the RICS show that more people are leaving the construction industry than are joining it, and almost 20% of the UK construction workforce is due to retire in the next 5 years.

Alongside that, the construction industry has for some time relied upon skills imported from Europe: the Office for National Statistics estimates that 28% of construction workers in London – albeit an area probably more cosmopolitan than most – are EU nationals.

Against this background, the Brexit deal confirms what we’ve known (or suspected) for some time – namely that the free movement of people between the UK and the EU has ended. The deal itself has very little to say on this issue; the only mention of it is in one of the shorter annexes (at page 768, if you’re curious), in which both sides agree to ensure that visa processes and the like follow “good administrative practice”.

Instead, EU nationals looking for work in the UK will be subject to the same processes as those from any other part of the world – the points-based system the government has introduced for immigration. The key aspects of this system are that all prospective new arrivals from the EU will require a visa in order to work. In order to obtain such a visa, the candidate will need to speak English, and (perhaps more significantly) will need a job offer in a qualifying occupation, from an approved UK employer, that pays the going rate for that job (at least £25,600 and potentially more depending on the job). Even then it isn’t guaranteed the candidate will have sufficient points to get a visa.

In terms of qualifying occupations, the skills-based system divides jobs into three categories: “shortage occupations”, where some of the visa requirements are relaxed; regular, skills-based occupations, where the usual rules apply; and “unskilled” jobs, where visas cannot be obtained. For the construction industry, most engineering and architectural roles are currently listed as shortage occupations, whilst conversely those jobs caught by what the ONS calls “elementary construction operations” are not currently eligible for visas at all. Everything else – construction managers and directors, technicians, surveyors, project managers, M&E trades and supervisors, steel erectors, brickies, masons, sparkies, roofers, plumbers, carpenters, glaziers, plasterers, floorers, and painters and decorators (and that’s the government’s list, not mine) – are subject to the usual rules.

The main issue the system presents for the construction industry is its lack of flexibility. Applicants must have a confirmed job offer before applying for a visa, and the application process will take at least four months. That makes it very difficult for employers to recruit from Europe for specific projects or to meet immediate needs. There are also restrictions on movement between employers that will usually require employees effectively to apply for a new visa every time they change jobs – and of course, each such application costs money and takes time. For an industry that survives on a very flexible labour market, this is likely to present difficulties.

Of course, the main benefit of Brexit (at least as far as the UK government is concerned) is that it allows the UK government to take back control. If the current system creates serious skills shortages in the construction industry, one would assume that the government will add to those occupations that are considered shortage occupations, or potentially even waive visa requirements in certain areas.

Equally, the government would probably prefer UK employers to be recruiting from within the UK, if they can. In order to achieve this the industry will need to make significant strides in attracting new talent. The increases to salaries that will ordinarily follow sustained skills shortages will help, as will initiatives such as the West London Construction Academy, one of the first purpose-built construction academies in the UK and a joint venture between West London College and the Berkeley Group.

Whether this will be enough, however, remains to be seen. What is clearer is that if the industry is going to continue to rely, to a greater or lesser extent, on imported talent, that is likely to require changes to the way the industry does business to a less flexible model – and that change is likely to increase costs.

Materials

The Brexit deal has a lot more to say on the subject of trade – hardly surprising since it is a trade agreement.

As part of the EU, the UK enjoyed free movement of goods between the UK and the rest of the EU. Probably as a consequence of that, the UK sourced the bulk of its construction materials from the EU: the Department for Business Skills puts the figure at 64% of all construction materials used in the UK being imported from the EU. The UK imports many more construction materials than it exports – a trade gap that has been consistently widening since the 1990s.

As with people, that freedom of movement of goods has come to an end with the UK’s departure from the EU.

In its place, the Brexit deal sets out the bones of a free trade agreement between the UK and the EU. The key bit – or, at least, the bit that Mr Johnson has referred to most frequently – is that neither side is permitted to apply tariffs, duties or taxes on any goods imported or exported by the other beyond those applied internally (in other words, any taxes applied to imported goods must be fundamentally identical to the same taxes applied to the same goods sourced internally). That’s Articles 5 and 6. Articles 10 and 11 prevent restrictions and monopolies on imports and exports.

So far so good. But the price of the UK’s desire to move away from standards harmonisation with the EU is that there will be more red tape. There will be inspections and certificates. Import and export licences will be required (Articles 13 and 14). And both sides will be able to levy fees to cover the cost of administering border controls (Article 7).

And there are more rules too. Lots of rules. About origination, administration, conformity, co-operation…and much more besides, that dictate how goods can be moved between, or through, the UK and the EU. These rules, which are set out only at high level in the Brexit deal, will very likely prompt detailed legislation in due course.

At the time of writing, this is already having an effect on UK-EU trade, with plenty of newspapers leading with photos of queues of lorries at the border, and some fairly hyperbolic headlines about EU companies refusing to import into the UK, because of all the red tape. However, once the shock of the new system has worn off, it has to be hoped that this process will become more efficient and effective. There’s no question that trade won’t be as straightforward as it was when the UK was part of the EU, but equally there’s no question that trade will continue nonetheless.

The likelier long-term consequence is that the price of materials will increase to cover to cost of that additional red tape. Logically that cost impact ought to soften over time as processed become more streamlined and efficient; on the other hand, as the UK moves away from EU standardisation it is possible that more steps, and more checks, may be required.

Time will tell as to the extent of the impact that Brexit has on UK-EU trade. It is certainly clear, however, that both sides intend that the Brexit deal should have as little impact as possible. Hopefully those intentions will follow through as the deal is implemented.

Public Projects

One of the consequences of the EU’s free movement principles is that any company in the EU can bid for public projects anywhere else in the EU, without discrimination based on their country of origin or indeed their experience in that jurisdiction. To implement this, all public projects (that meet certain criteria) are advertised using the EU’s OJEU notices, and anyone, anywhere in the EU, can bid for them. The public procurement market in the EU was worth around €2trn in 2015 and had been growing fairly consistently until the pandemic.

The flip side, of course, was that UK companies had to compete against companies from elsewhere in the EU for UK projects, and there has been plenty of political rhetoric to the effect that EU companies competing for work in the UK have done better than UK companies competing for work in the EU. There have also been suggestions that, post-Brexit, the UK’s public procurement market would be closed to European companies.

If that was ever the government’s plan, it hasn’t happened. Instead, public procurement is addressed pretty succinctly in the Brexit deal. The short point is that although the EU and the UK will now operate separate public procurement procedures, the intention is that both systems will be open to each other, with the same principles of non-discrimination in place. So EU companies will still be able to bid for UK public work and vice versa. To implement that, the UK has introduced “Find a Tender”, which is the UK-specific replacement for OJEU notices that went live at 11 pm on 30 December 2020. Anybody planning to work on any public projects should familiarise themselves with this system promptly.

So the status quo is more or less maintained in this regard, which might be great news or terrible news depending on which side your bread is buttered.

In any case, however, the devil here is again likely to be in the detail. Alongside the legislation that will likely follow in order to give effect to these new principles, it will be interesting to see whether, in due course, the UK market becomes more hostile to European companies, and, if so, whether the EU will do (or is able to do) anything about it – and vice versa.

Finance

In leaving the EU, the UK no longer has access to the European Investment Bank (EIB) and the European Investment Fund. Those two organisations committed €7.8bn of investment to major infrastructure projects in the UK in 2015, including into major projects such as HS2 and the Thames Tideway Tunnel.

The significance of losing access to the EIB in particular is that it provides a cheaper source of finance than most private equivalents. Equally, its involvement in a project is usually seen as a good means of attracting investment from alternative sources, particularly for higher-risk or novel projects, due to the strength of the due diligence that it carries out prior to investment.

The other major contribution made by these two institutions is investment into small and medium-sized enterprises that meet certain criteria – €665.8m in 2015. That has been a vital source of investment particularly for new and innovative businesses to obtain funding in circumstances where the private sector might have considered the venture too risky.

In principle, however, this ought to be a clear win for the UK in leaving the EU. The EIB is, of course, funded by the EU’s member states, and the EIB’s investment in the UK hasn’t matched the UK’s investment in the EIB since the mid-80s; even before the 2016 referendum the EIB’s investment in the UK was consistently below half that of the UK’s investment in the EIB. Giving that money back to the UK government ought to increase the cash available for investment in infrastructure in the UK.

Equally, in 2014 the UK government founded the British Business Bank (the BBB), which has (broadly speaking) stepped into the shoes of the EIB in providing investment to small and medium-sized enterprises. The BBB made headlines in the construction sector following the collapse of Carillion as it provded £100m of lending to smaller construction companies affected by that event, and has been particularly instrumental in providing funding to distressed businesses during the pandemic.

There is ongoing discussion as to whether the UK will create a UK equivalent of the EIB to manage its investment in major infrastructure projects. Given the recent criticisms of the government’s due diligence in funding projects such as HS2, that might not be a bad idea.

The Future

For those of us – which is most of us – who have been staring at the same four walls for most of the last nine months, the impact of Brexit might well pale into comparison with the impact of the pandemic on the industry and the country as a whole. Turner & Townsend have estimated that the sector as a whole suffered a 35% drop in productivity in 2020 due to COVID-19, and at the time of writing the end is far from in sight.

However, the UK’s road, rail and aviation networks are already at or over capacity limit, and current estimates have the UK at a housing deficit of 3.9m, requiring at least 340,000 new homes a year to be built between now and 2032. More than ever, the UK needs significant investment in housing and infrastructure (remember the Chancellor’s promise of a £600bn investment back in March 2020?) and a strong and proactive construction industry to deliver on that investment.

Whether the UK’s departure from the EU helps or hinders in that regard remains to be seen, but the UK’s arrangements with its nearest and largest trading partner will inevitably be at the heart of any post-pandemic economic recovery.

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