Now that the dust has settled following the Brexit vote, Tom Collins looks at the prospects for continued investment in infrastructure projects
Government commitment to infrastructure spending has long been seen as fundamental to creating growth and building a strong economy in the UK. However, the construction sector was already underperforming compared to the rest of the UK economy before the Brexit vote in June. So what is the outlook post Brexit for major infrastructure projects in the UK and what is the outlook for many small and medium sized businesses who work on and contribute to those projects?
There have been many views, comments, opinions and reports about the impact of Brexit but the reality is that no firm view or forecast can yet be made until negotiations on the terms of the exit are in train and concluded. For the time being, EU legislation implemented into UK law will remain. It seems unlikely in the short term, and indeed potentially in the long term, that significant portions of such EU law affecting infrastructure projects will be repealed. However, any reduction in migration as a result of Brexit negotiations might well impact on the supply of labour for infrastructure projects at a time when concerns are already being voiced about a skills shortage in the market. This could lead to an increase in cost on projects and the potential for delay.
Infrastructure spending falls
The Brexit vote has led to a period of uncertainty and reports of some major investment decisions being put on hold. It has been reported by Barbour ABI that, in the month following the vote, the spend on infrastructure projects fell by some 20 per cent. This is likely as a consequence of hesitancy by private investors given the uncertain outlook as to the UK’s role in the global economy going forward and the impact of currency fluctuations. If external private investors are exercising caution will they continue to invest significantly in infrastructure projects? As a result this makes government commitment to investment all the more important. Indeed, Patrick McLoughlin MP (when he was still Secretary of State for Transport) said in the immediate aftermath of the Brexit vote that: “Investment in the long term infrastructure we need, has become more important, not less.”
Questions then remain about what will happen to or replace EU funding, for example from the European Investment Bank, for such projects. Some comfort may be taken from recent reports that the government is prepared to continue to support projects which have already received funding even after the exit from the EU but uncertainty remains as to those which receive EU funding after the autumn budget statement.
In addition to concerns about Brexit there remain to be addressed long held concerns from small to medium size Tier 2 contractors about how they become involved in major infrastructure projects. It is commonly reported that Tier 2 contractors face difficulty in securing opportunities to tender for work on major projects and that even if they are successful they face issues such as:
- disproportionate levels of risk being transferred down to them
- ensuring that they are paid on time, and
- being asked to provide or contribute innovative building solutions, with concerns that they may thereby be foregoing intellectual property rights.
Continuity for small and medium businesses?
HS2 Ltd has recently undertaken a series of roadshows and events to advertise opportunities for contractors at Tier 2 and below, and it has sought to assuage fears that it is difficult to get on board. HS2 Ltd reports that it aims for 60 per cent of contracts to be awarded to small and medium sized enterprises. It has mandated that Tier 1 contractors use CompeteFor to advertise and pass down opportunities in order to ensure an open market. However, as noted above, it is perhaps unlikely in the short term that EU procurement rules will be repealed, so any hope that local contract awards may become more common will not immediately be realised. HS2 Ltd has further suggested that it will seek to ensure that Tier 1 contractors make payment to
Tier 2 contractors on time and, to achieve this, HS2 Ltd has said that it is considering making direct payment to subcontractors should Tier 1 contractors fail to do so in the timescales which HS2 requires.
So following Brexit there is inevitably a period of uncertainty but the government is sending messages that its commitment to infrastructure spending will remain. In the meantime efforts need to continue to ensure that small to medium size businesses can continue to contribute to the economy. This means ensuring that those businesses are given opportunities to effectively tender for infrastructure project works and once appointed payment terms are adhered to and risk is allocated fairly down the contractual chain.
Tom Collins is an Associate at national law firm Weightmans