Position Paper: The impact of the EU referendum outcome on the infrastructure industry
April 2017
• Balfour Beatty is a leading international infrastructure group. With 15,000 employees across the UK, Balfour Beatty finances, develops, delivers and maintains the increasingly complex infrastructure that underpins the UK’s daily life. Delivering projects across transportation, power and utility systems, social and commercial buildings: from Crossrail and the Channel Tunnel Rail link, Heathrow T2b to the M25, M60, M3 and M4/M5; Sellafield and soon Hinkley C nuclear facilities; to the Olympics Aquatic Centre and Olympic Stadium Transformation. We also have significant experience and understanding of the links between infrastructure investment and regeneration and economic growth.
• Effective, reliable infrastructure is widely recognised as vital to a country’s economic success, as well as acting as a stimulus for economic growth. However, this close link between the strength of the economy and infrastructure can also present difficulties. The vote in June 2016 to leave the EU is likely to have a significant impact on the UK economy for at least the next decade, and there is little doubt that a prolonged period of uncertainty will impact infrastructure investment and delivery in the medium to long term.
• This paper focuses on constructive and innovative proposals to address some of the uncertainties and challenges created by the referendum result. It also identifies opportunities from Brexit and provides commentary on these ideas setting out some of the repercussions of the vote for the infrastructure industry. Any positive consequences of Brexit will of course rely on the detailed outcomes of the negotiations. We urge those undertaking the negotiations to maintain their focus on the crucial role infrastructure and skills play in economic growth and therefore in the future of the country. To assist this process this paper also sets out a vision of what a good outcome from Brexit would look like for Balfour Beatty.
2. What would an ideal Brexit look like?
• Economic growth in the UK should remain at the top of Government’s agenda throughout and following the Brexit negotiations, with continued investment in economic infrastructure placed at the heart of the new industrial strategy.
• The UK must remain “open for business”. We welcome the Government’s Industrial Strategy and believe that it should be so designed to ensure continued foreign investment in infrastructure. There must be also continued funding for infrastructure to replace the investment the country currently sees from, for example, the European Investment Bank, to help the economy grow and be rebalanced.
• Investment in the domestic work force should continue and be accelerated in order to address the national skills shortage. This should take various form, for example, through promotion of earn and learn opportunities, increasing the diversity of the work force, retraining former armed forces personnel and ex-offenders and other schemes.
• Alongside investment in the domestic workforce, we believe that the Government should develop a migration system that allows the construction industry to attract and retain the talent it needs from the EU and beyond, in order to make up any shortfall. This requires an immigration regime which is sufficiently open to address the full range of skills shortages in the construction sector and enables the sector to recruit key workers without fees or costly bureaucratic arrangements. We do not favour a particular solution: it could, for example, involve a phased withdrawal of Free Movement, for instance, over a ten-year period; or a fast track work permit for sectors with skills shortages.
• Furthermore, there should be an agreement, as early as possible, to guarantee the rights and status of EU nationals already working in the UK.
• Finally, we would welcome an arrangement for the construction sector to ensure the best possible access to the EU single market to avoid unnecessary tariffs or non-tariff barriers to trade in key materials and machinery.
3. Skills
• Balfour Beatty believes that a strong and resilient construction industry needs a robust domestic skills base. As a British company with a hundred year legacy in the UK, Balfour Beatty is committed to addressing the skills shortages in the UK and investing in home grown talent. Balfour Beatty employs over 150 apprentices each year in the UK in addition to the 320 currently under training in a diverse range of roles across the business. We employ around 700 more young people on graduate and part-time higher education/degree schemes. Balfour Beatty is also a long standing member of The 5% Club, an employer led organization set up by our Chief Executive, Leo Quinn, three years ago, aiming to address the skills gap by getting more young people into earn to learn opportunities, encourage businesses to take the lead on training and promote apprenticeships as a positive career decision. Leo Quinn also leads the skills work stream of the Government’s Construction Leadership Council (CLC) which is setting targets and recommendations for the construction industry to build momentum and commitment in tackling the skills shortage.
• However, developing the skills we need to build tomorrow’s infrastructure takes time. It can take a decade from starting an apprenticeship or training for someone to gain all the skills they need in specialist areas such as nuclear new build for example. With various large infrastructure projects in the pipeline, including mega projects such as HS2 and Hinkley Point C, our progress in addressing the skills gap needs to accelerate.
• Furthermore, while it is essential to invest in home grown skills, the increased volumes of workers the industry is expected to need, together with the ageing workforce, mean that it will be challenging to recruit the skilled workers the industry requires to build tomorrow’s infrastructure, even if we guarantee the right to stay of existing EU migrants in the industry. The projected need is for over 250,000 construction and over 150,000 engineering construction workers by 2020, driving a need to recruit and train nearly 100,000 additional skilled workers by the end of the decade . If the EU workers in the industry were to leave, this figure would be undeliverably high.
• For the infrastructure industry, free movement of labour in the EU has allowed us to find the skilled staff we cannot currently find in the UK. Indeed, Royal Institution of Chartered Surveyors (RICS) data shows that 8% of the UK’s overall construction workforce is made up of EU nationals and in November 2016:
o More than 10% of the Balfour Beatty workforce held non-British EU passports and around 11% of new recruits in 2016 held non-British EU passports.
o Around 100 of our 2016 recruits came to us via a pro-active campaign targeting Greece and Portugal with a further 40/50 expected in 2017.
o In our supply chain, the proportion of non-British EU workers is even higher.
o However, only 0.2% of our 2016 recruits come from outside the EU due to the complexity, cost, administrative burden and time delays required in managing the current points based sponsor licence system.
• However, figures show that the number of EU-born workers in the UK has begun to decline following the vote to leave the EU, highlighting that the uncertainty surrounding whether, and on what terms, EU citizens will be able to stay in the UK may have reduced its attractiveness to Europeans. Analysis by the Resolution Foundation think-tank shows that graduates were the biggest driver of the fall in numbers, with the construction industry seeing one of the steepest falls.
• Uncertainty around the free movement of labour in the EU could cause the industry recruitment and staffing difficulties and may increase costs where demand for labour outstrips supply, with the subsequent risk of project delays. As the costs of government funded construction projects increase taxpayers will carry the burden. We therefore welcome the Government’s intention to reach an “early agreement” guaranteeing the status of Europeans living in the UK and the commitment to treat this issue as a priority.
• With these challenges in mind it is vital that efforts continue to address the skills gap in the UK and we need strong strategies from Government and industry to both maintain the skills base in the UK, as well as attract talent from overseas. Innovative solutions such as retraining Armed Forces veterans and ex-offenders; “returnships” to increase gender balance; and schemes to increase diversity can help cut costs and address the skills shortage and we recognise that it is for the industry to step up to the plate and implement such measures.
• We also see digital technology, modular design and offsite construction as very powerful innovations to reduce the cost of housing and other infrastructure. The offsite construction sector currently accounts for around 7% of total construction output in the UK and increasing. These technologies have potential beyond addressing the skills shortage: they can help address the need for new housing and the low carbon agenda also. Balfour Beatty has a purpose built off-site manufacturing facility manufacturing products including packaged plant rooms, service modules, riser modules and modular electrical systems. Working in this way is safer (e.g. significantly fewer ‘at height’ hours), more productive, high quality with less waste, and provides customers with substantial savings in terms of time and money.
• However, we believe that there is also a case for examining Home Office Shortage Occupation List in the short-term as an interim measure, to ensure that the industry has access to the talented, highly skilled individuals it needs to help fulfil the Government’s house building objectives and to deliver the UK’s predicted £500bn infrastructure pipeline. Additions to the list could include Site Engineers, Project Managers and Commissioning Engineers, which are all roles where the UK has a significant shortage of skilled workers.
4. Procurement
• Depending on the outcome of negotiations on the UK’s exit from the EU, there could be implications for the infrastructure industry in terms of procurement of materials, machinery and equipment from the EU. Raw materials, such as cement and bitumen, could be subject to tariffs or taxes. Recent government data shows that 61.6% of imported building components and materials come from the EU, equating to a net total of £5.7bn, up from £4.9bn in 2015 .
• Large machinery is also imported and purchased from the EU intermittently, for example boring machines for use on major tunnelling projects such as HS2. Ultimately, higher prices will have an impact on end customers and taxpayers. Indeed, some of this impact is already being felt, as companies are beginning to price in risk to allow for day to day currency fluctuations, which impact import costs on a business as usual basis.
5. Opportunities
• Of course, every set of challenges also presents opportunities. While a period of lower growth would mean lower tax receipts for the Treasury, the current low interest rates - predicted to sink even lower - mean that now is an ideal time for government to borrow money in order to finance infrastructure projects, and we welcome the commitment to invest more in infrastructure outlined in the 2016 Autumn Statement. As referenced above, infrastructure investment delivers significant benefits, not only in terms of direct employment relating to the build and long term maintenance of the scheme and the spend that goes via the supply chains; there is also a well-documented multiplier effect.
• As the UK may no longer be bound by single market rules which restrict an active industrial policy, Brexit could also present an opportunity for the much talked about diversification of the economy away from financial services and back towards industries such as engineering, construction and manufacturing. This, in turn, would support the rebalancing of the economy more evenly across the regions. With an infrastructure industry placed at the heart of a new industrial strategy there may also be potential to export the sector’s skills overseas.