Sector blog – The north of England and the future of the construction industry

construction industryThere is no doubt that the construction industry has been having a torrid time in the last couple of years, especially since the collapse of the contractor Carillion with debts of £1.5bn at the start of 2018.

The most recently published insolvency statistics, for the third quarter of 2019, showed a 55% increase in the number of companies falling into administration, continuing an upward trend that had been going on all year.

There is little doubt that the political uncertainty since the UK voted in June 2016 to leave the EU has been a contributory factor to the industry’s woes, which are compounded by a shortage of people with appropriate skills. The skills shortage in the construction industry and its reliance on labour, often as subcontractors, has for several years been mitigated by the use of EU labour, particularly from Poland, but this, too, has been disrupted in the aftermath of Brexit as attitudes to migrants have become less welcoming.

But there have also been knock-on effects from the collapse of Carillion, which are being attributed to the structure of the industry, where major contractors like Carillion were focused on winning projects and managing them, relying on subcontractors to carry not only the responsibility for doing the work but also for taking the financial risk based on exposure to fixed price contracts and poor payment terms.

Indeed, when they go bust there is little left for creditors which highlights the level of credit risk.

Is the situation for the construction industry about to change?

Now that the Election is over and that the Government has a solid majority, hopefully, it will focus on the many pressing domestic issues that had been overshadowed by Brexit, not least the economic imbalance between various UK regions and London.

Indeed, the Prime Minister has already been warned that unless more attention is paid to the North of England particularly, those voters who lent him their vote, they may well withdraw their support equally quickly if they don’t see tangible investment.

In late December and again this week there were some signs that the message had been received and understood.

The Prime Minister had already promised that their trust in his government would be repaid and both The Times and the BBC were reporting that there was the prospect of changes to Treasury rules coming that would allow more cash to be allocated to projects outside of London and the South East, notably on infrastructure, business development projects and schemes like free ports.

Then, on Tuesday, when March 11th was announced as the date for the Chancellor’s first budget, the predictions of Treasury changes were again emphasised:

“In the intervening two months, the Treasury will have to work up a new National Infrastructure strategy that delivers on the plan to rebalance regional inequalities, some of which stem from decisions made nationally on, for example, transport spending.”

While doubts have been raised about the viability of the proposed HS2 rail project to connect London to the North, said to be likely to cost almost three times more than predicted, should this radical rethinking of Treasury rules come to pass, hopefully it could open up opportunities for the construction industry to work on plenty of other big projects in the North and possibly also the Midlands.

The other area that is likely to benefit the industry is a massive house building initiative. While no policies have been announced, Dominic Cummings’ Alternative Civil Service may light a bonfire under planning restrictions that are often blamed as the impediment to achieving previous governments’ targets. I am also sure we shall see more financial stimulus aimed at new owners, again all initiatives that will benefit the industry irrespective of what happens to the economy.

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