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What will happen to the construction sector post-budget?

February 2021

Written by Damon Schünmann, Strategic Consultant at Barbour ABI

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      Damon Schunmann, Strategic Consultant at Barbour ABI interviewed Chris Davies, joint MD at DRS Bond Management. As an organisation that specialises in broking contract guarantee bonds as an alternative to bank guarantees, it typically takes a deep dive into its clients’ finances before making a decision on providing a bond arrangement. Carried out across multiple businesses, this provides an overview of the sector’s health and means DRS has a feel for the impact of government policy on UK construction businesses. I asked Davies for his thoughts on the CLC’s letter to Rishi Sunak in advance of the March Budget, to get his sense of why the CLC has prioritised certain agendas and whether they might gain traction.

      Setting the scene

      The CLC has shown leadership during the pandemic. I think this letter is relatively predictable in that it outlines the importance in terms of GDP that construction brings to the UK economy and it sets the picture and tone for the impact that Covid has had on construction. Clearly as it’s a lobbying letter it ignores the fact that construction has been a very significant beneficiary of the government’s support schemes in terms of furlough, CBILS [The Coronavirus Business Interruption Loan Scheme] and the large business coronavirus scheme [CLBILS] and various other incentives.

      But construction has been impacted. We’ve seen new methods of working, which many companies have adapted to and for the businesses we speak to, most sites are somewhere between 85 and 90% of normal pre-Covid levels of operation. So, they’re not as efficient as they were, and unlike say the Republic of Ireland where there is an agreed loss of expense formula on public works, there’s no such thing here. There are delays – and yes there are extensions [to cater for these], but a lot of companies haven’t recovered cost, they’ve only been able to recover time. So, construction has been hit, there’s no question about it.

      Manifesto alignment

      It’s fair to say they’re aligned here with the government’s manifesto commitments, particularly around the levelling up agenda. When you get into the meat of what they’re actually asking for; net zero is obviously a fine ambition and a national retrofit strategy is the sort of big green announcement that is likely to be attractive someone like Boris. If you look at the schemes that he has pushed through – not least HS2 – a national retrofit strategy would fall into that camp. I would hope that the government is being lobbied very significantly around that because it has the advantage of not just being a headline grabber, it’s something that would last – like the ‘Decent Homes’ scheme in the noughties – for probably ten years. That would provide a good pipeline of work at a time when people are desperate for one.

      I think that where it starts to get trickier is that reverse charge VAT is not going to get overturned. If it was, it would have some time ago. HMRC are well entrenched now and they’ve been writing to companies for some time saying it’s going to start from the first of March – and it will. I wish it didn’t but it’s going to.

      But there are also some relatively easy wins here because I think the stamp duty holiday will almost certainly get extended [this has been reported as such, post-interview]. A lot of the economic data suggests that if they extend it for several months then there’s hundreds of millions of net benefit from doing that.

      And for things like employer apprenticeship incentives and [funding commitments for] the apprenticeship levy – you would expect [the CLC] to be asking for these in a pre-budget situation. In unemployment terms, those below the age of 25 have suffered disproportionately during Covid. That certainly is something that it would be quite easy for the government to acquiesce on and would make a lot of sense economically.

      The Infrastructure Bank

      It will be interesting to see how the Infrastructure Bank evolves to make it an effective vehicle for regeneration. It plays very strongly around [government announcements for] levelling up, particularly in the north. One of the things that we do expect to see – and not just over the lifetime of this parliament but for probably two beyond – is not less spending in the south, but certainly more spending per capita for new infrastructure in the north than in the south and there has to be. If you spend any time outside the M25 and the home counties, then the further north you go it’s quite clear that the infrastructure is just not fit for purpose.

      In summary

      I think overall it’s a good, well-written letter with laudable ambitions if a bit ‘well they would say that wouldn’t they’ if you were looking at it from the other side of the fence. But the CLC have done their job and once again acted in the best interests of the industry, though I’m not sure that everything they’re asking for will happen – and I suspect that most of it will not. But the bits that do could be significant such as the national retrofit strategy, the evolution of the infrastructure bank and the continuation of the stamp duty holiday for a further period of months.

      I think the CLC are broadly supportive of the challenges that the government faces coming out of the other side of Covid. They could have gone down the magic money tree route and asked for the earth, the moon, the stars and the sun – like the cancellation of interest and possibly capital for an extended period on some of the CBILS loans.

      Yes, they could have gone further and asked for more, but at the end of the day, the name of the Construction Leadership Council is on the tin as it were – they’re not a trade union body. They’re here to make balanced, reasonable requests, given the virtually half a trillion of debt that’s been added to the UK balance sheet as a result of Covid.

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