January 24, 2017

What must the Brexit negotiators bear in mind for the UK construction industry?

Despite Theresa May having delivered her much anticipated Brexit speech earlier this month, there is still overwhelming uncertainty surrounding the Brexit process. In part this may be due to the Government not wanting to reveal its hand before negotiations begin but there was very little reassurance for the construction industry.

Her stance on immigration stuck fast, announcing to the nation that she would deliver on promises to 'control immigration to Britain from Europe'.  Of course, the problem for the domestic UK infrastructure industry is that it is underpinned by skilled foreign labour predominantly sourced from the EU.

Depending on the Prime Ministers approach to work-permits the industry could be on the precipice of a debilitating skills shortage. With the current shortage already being felt throughout the industry any restrictions to the number of European skilled workers permitted to work  in the UK would only worsen the situation.

Late last year, during the Autumn Statement, the Government set out ambitious plans for investing in the growth of UK infrastructure. With the Housing White Paper due out this month, it's clear this Government has high hopes of making its mark on the country's infrastructure. However, what it may be forgetting is that without this skilled manual labour the UK will not make any progress in addressing the housing shortage, or indeed in giving a much needed update to our ageing infrastructure.

There is also the issue of priorities.  If any workable deal is to be made, any negotiations with the remainder of the EU will no doubt involve a trade-off between different interests.  From media reports and Mrs May's speech its seems clear that the government's number one priority will be to preserve (insofar as possible) the pre-eminence of the City of London in the financial industry in Europe.  In fact, Mrs May's bargaining chip, namely the UK going 'rogue' in terms of regulations, corporate taxation etc if an acceptable deal cannot be achieved, seems to be aimed squarely at achieving this key objective.  Will the interests of the construction industry be an acceptable trade-off for the government in circumstances where it cannot achieve all of its objectives?

So what must the negotiators bear in mind if they are to get the best possible deal for the construction industry?


First and foremost, we are nothing without our people. Theresa May has made it clear she is willing to give up access, in its current format, to the single market in order to reduce the number of new EU migrants entering the country. She has also made it clear that the country will welcome 'highly skilled labour from Europe' but there is no reason to assume that this would extend to an adequate supply of much needed trades for the construction industry.

The notion of work-permits has been touted around, no doubt with the accompanying bureaucracy and inflexible 'hard thresholds'.  Given skill shortages, one would expect that some construction operatives (at least) would pass these tests.  Others might not.  Experience shows that government agencies do not tend to be the most reactive bodies for matching supply and demand so, at least, one could expect time lags as immigration policy catches up with under-supply. 

For the construction industry to benefit negotiators must look at reactive and flexible rules, with low transactional costs, so as to prevent the choking of the industry with inefficiencies. However, if negotiations fail, then the UK will have autonomy over its borders and so a 'deal' may not be necessary.  In those circumstances, the role of the UK government would be to assist the industry in terms of making sure that foreign skilled workers are incentivised to come to the UK, rather than the other major economies in the EU who can offer them social security, health, ease of travel for them and their families and (perhaps) payment in a harder currency.

Market access

Effective market access depends largely on the possibility of competing for public procurement construction projects abroad, whether that's the UK or the EU. The absence of multilateral rules for procurement is widely considered as one of the most important non-tariff barrier affecting the sector.

With potentially reduced market access UK construction firms operating in Europe may have to look elsewhere to replace existing revenue streams. Similarly, EU firms could miss out on UK procurement opportunities. This could lead to more opportunities for UK firms, or potentially increased investment from abroad (just not from the EU).

The negotiators must consider the impact lack of EU market access will have on the construction industry. If market access is not maintained in some way, will the UK strike up similar deals with other countries to allow UK businesses to seek similarly lucrative growth opportunities elsewhere?

With the increasingly protectionist stance of some of the world's leading economies, the negotiators must ensure they are not banking on securing trade deals outside of the EU that may not materialise in the future.  

Customs Union

Finally, over the decades the EU has developed supply chains and industries based on comparative advantage between the member states, eased by the principles of free movement.  With the fall in the value of Sterling, many UK manufacturing businesses may have become more competitive.  However, as the divorce from the EU is put into effect, the UK may become less competitive if their available markets are closed down and access to skilled and inexpensive labour reduced. 

The operation of tariffs can only exacerbate this problem, whether making UK exports uncompetitive abroad or the inflationary effects upon build costs due to imported construction products.  Trade deals with other countries may eventually fill any gaps in supply or demand, but there will be a period of market inefficiency unless a replacement for the customs union can be agreed upon.  No doubt, as part of this, UK would need to meet minimum standards contained in EU regulations from time to time.  Unlike the threatened position regarding corporate taxation and the regulation of the financial industry, it seems that there is little opportunity for a 'race to the bottom' to benefit the construction industry.