Brexit: Time to be heard

A prevalent view is that the outcome of June’s General Election – returning a government without an overall majority – was unhelpful for business and the economy generally.

Personally, I don’t agree. I think the outcome of the election was the best we could have hoped for in the circumstances, renewing democratic strength in the House of Commons by finely balancing power between our elected representatives. It is already resulting in the search for consensus over conflict, and more moderate policy outcomes.

But the most spectacular effect of the election has been on the discussion over Brexit. To quote a senior government official, it has “brought forward by perhaps a year the debate over what realistically can be achieved”. That translates into an opportunity for business to inform and influence the Brexit outcome. The Confederation of British Industry, the British Chambers of Commerce, the Trade Union Congress, and others are engaging directly with ministers, presenting a consistent message to put jobs first. The construction industry voice needs to be part of that. We must step forward now with clear, grounded views if we are to be heard.

There are three areas where I believe the future productivity of our industry is at risk and we need to set out our stall.

Failure to maintain membership of a free trade area will mean both added tariff costs and import delays

The first is frictionless trade with Europe. The UK’s economic success over many centuries owes much to free trade. Some 22% of construction materials used in the UK are imported, of which 62% come from the EU. Since the Brexit vote the fall in the value of sterling has driven a 6.8% increase in the cost of materials in the sector, according to Noble Francis of the Construction Products Association. This is squeezing margins.

The RICS Q2 survey suggested margin expectations had dropped from 18% to 8%.

Of course, that masks much lower margins for Tier 1 contractors, which in 2015 were on average below 2% and are now expected to drop even lower.

We know where this ends – in Ray O’Rourke’s words with “a race to the bottom”. Failure to maintain membership of a free trade area will mean both added tariff costs and import delays. There are only downsides for our industry, and for UK business generally, to end up in that position.

Secondly, there is a question mark over continued access to sufficient labour. As of March 2017 there were 2.3 million EU workers in the UK, representing 7% of those in work.

But the construction industry is disproportionately exposed, with 9% of the labour force from the EU. At hotspots like the Nine Elms development, the share of EU labour is an astonishing 70%.

I challenge the sector to put itself at the forefront of using flexible working and technology to create opportunities for single parents who struggle with childcare

It is not credible to assume that we can simply switch EU to British labour (even were we to believe that was a worthy objective, which personally I do not). Unemployment in the first quarter of 2017 was 4.6%, the lowest since 1975. And the Office for National Statistics (ONS) projects that the UK population aged 16 to 64 will remain largely unchanged at 41.5 million by 2027.

Yet we are already seeing the damage to the capacity of our industry from the referendum result. Net migration from the eight eastern European countries that joined the EU in 2004 has fallen from a peak of 87,000 in 2007 to just 5,000 last year. In May, Aecom UK head Patrick Flaherty remarked upon “an exodus of construction labour out of the UK market”.

Our industry could help itself by finding ways to attract some of the estimated 2.1 million individuals who according to the ONS are outside the labour market but want a job. I challenge the sector to put itself at the forefront of using flexible working and technology to create opportunities for single parents who struggle with childcare and those with long-term illnesses or disabilities. But I also believe we should be vociferously supporting colleagues from the EU who want to continue to work in the UK, and arguing to maintain access to EU nationals to our industry in the future. Why would we want to turn talent away?

The third and final challenge is protecting investment. More than 65% of the UK’s infrastructure is financed by globally mobile private capital invested through our utilities. And over the five years to 2015, the European Investment Bank invested €29bn in the UK. Any restriction in access to capital, or an increase in the cost of capital, will ultimately lead to lower levels of investment and hence demand for our industry.

It is time for the sector to add its voice to those calling for a Brexit plan that protects our economy and our jobs, while also maintaining our self respect as citizens of a country with a proud heritage of economic liberalism.

Richard Threlfall is UK head of infrastructure, building and construction at KPMG