Dear Alistair: Building's spending plan for the chancellor

When chancellor Alistair Darling announced last week that he was prepared to bring forward public spending to beat back the spectre of recession, the construction industry heaved a collective sigh of relief.

The promise offered no detail on which sectors would be accelerated, let alone where the money would come from after the £500bn bail out of the banking sector. What it did do, however, was provide reassurance that public spending would not be cut – a prospect that economists reckoned would have left the industry facing a recession equivalent to that of the early eighties or nineties.

Darling’s promise

A fortnight on, however – and less than a month away from the moment when Darling is expected to announce his grand plan in the pre-Budget report – concern is growing over how the chancellor will make good on his promise. No detail has yet been forthcoming, but in parliament last week construction minister Ian Pearson reiterated the commitment, saying: “If we can speed up the investment process, it will create new jobs for prime contractors and down through the construction supply chain.”

So while Whitehall civil servants busy themselves with the latest takeaway order, Building – with a lot of help from the Construction Products Association (CPA) – has come up with a plan for the chancellor.

Our plan

Our calculations – presented here – bring forward £2.8bn of public money and PFI credits across five priority areas of education, health, housing, Crossrail and the Olympics, in a package that uses no additional funding.

The reallocation of education and health spending alone would bring the industry out of recession in 2010, a year earlier than expected, with an output growth of 0.2% rather than a 0.3% decline. So, Darling, if you really want to use the construction industry to help ease the recession, this is how you could do it.

Education

If the government were to bring 15% of its anticipated £4.6bn (£690m) public sector spend for 2011 and 10% of its £1.7bn (£170m) PFI pipeline for that year forward to 2009 and 2010, it would greatly increase output. If one-third is allocated next year and two thirds in 2010, according to calculations by the CPA, the 5.6% growth forecast for 2009 would become 11.2%; in 2010, output would grow by 8.8% compared with a forecast of 5%.

Where should the money be used?

Any funding brought forward must be spent in areas where the industry can use the money. The £45bn Building Schools for the Future (BSF) programme is scheduled to produce 100 schools by April 2009, 200 in 2009/10 and another 200 in 2010/11. But given that, by the end of this year, the CPA estimates that only 37 of these 500 schools will have been built, bringing forward significant numbers of extra ones does not look realistic.

The £7bn primary schools capital programme, due to be launched in April 2009, looks a more feasible bet – provided the government can put in place a procurement mechanism that does not wrap bidders in red tape, as BSF did. Another option, according to Michael Ankers, the CPA’s chief executive, would be to accelerate the Building Colleges for the Future programme – a £2.3bn, three-year spend from the Department of Innovation, Universities and Skills that is due to commence in March.

Healthcare

The Comprehensive Spending Review estimated that £1.45bn would be spent on publicly funded healthcare schemes in 2011, with another £1.4bn due to come from PFI. If 10% of the anticipated PFI spend (£140m) and 15% of the public spend (£210m) were to be brought forward to 2009 and 2010, this would increase construction output in the sector from 7.7% to 11.7% in 2009. It would almost double expected output in 2010 from 3.6% to 6.2%. The calculation is based on bringing forward one-third of the amount to 2009, and two-thirds to 2010.

Where should the money be used?

Although large PFI hospitals are a dying breed under this government, public-private healthcare spend still accounts for about £1.4bn of construction output in the sector. It is problematic, however, for the government to try to increase this owing to its private sector partners’ difficulty in attracting funding in the current climate.

Better to bring forward traditional spending on smaller publicly funded schemes – local polyclinics and the £1bn Express Lift scheme are good examples. Here procurement could be tied in with education under local authority partnerships to speed up delivery.

Housing

How much money could be brought forward? £793m

The carnage in the housing sector has left the big three of Taylor Wimpey, Barratt and Persimmon fighting for survival. Smaller firms have already succumbed: David McLean has been put into administration, and figures from Wilkins Kennedy published this week showed that construction has suffered the most business failures of any sector this year.

According to analysis done with with the CPA, it would be reasonable to assume that 30% of the £2.6bn earmarked for public housing in 2011 could be split evenly between 2009 and 2010. This would give a total of £2.8bn in 2009 (a 17.5% growth in output) and £2.9bn in 2010 (20.3%). “You could conceivably bring more forward in housing than in other sectors,” says Ankers, “as social housing starts are down to 23,000 this year and there is definitely spare capacity.”

Where should the money be used?

The government has said it will start 45,000 social homes by March 2011. Given that Whitehall now owns stakes in medium-sized housebuilders such as Crest Nicholson and controls the country’s largest mortgage lender, HBOS, surely this should be achievable? Not so, says Sarah Webb, chief executive of the Chartered Institute of Housing. “Housing associations can’t do anything without private sector housebuilding partners,” she says.

She argues that the money would be best spent on buying up land to build on once the market – and the private sector housebuilders – comes back. “We are looking for short-term fixes when there probably aren’t any,” says Dacey. “What we need to be doing is making sure we are ready to come out of the recession with a flying start.”

Olympics and crossrail

How much money could be needed? £805m

Olympics minister Tessa Jowell last week put the shortfall in funding for the Games from the private sector at about £500m. The government has already approved £95m from the £2.2bn contingency fund for use on the Olympic village. This leaves a current shortfall of around £405m needed to keep the programme on track.

Another major project in need of a funding boost is Crossrail. Development sources say the project is currently facing a shortfall of about £300m-400m out of an anticipated £800m from property deals. Agreements with BAA and City Corporation, due to have been signed a month ago, are still “weeks away” from conclusion, according to project sources.

Where should the money be used?

The bulk of any additional Olympic funding would be needed for the £1bn village, where the number of homes has already been slashed from 4,000 to 2,700, and where developer Lend Lease is unlikely to take its planned £450m equity stake until the market improves. A source close to the talks said this week: “The way the market is just now, why on earth would Lend Lease put money in when it can let the government pick up the slack?”

The Olympic Delivery Authority has asked the communities department for £250m to help fund the homes in the Olympic village. This has not yet been agreed, but there is always the contingency fund.

The £400m media centre is also facing a potential shortfall of up to £180m, the contribution intended to come from developer Igloo, if it cannot raise the money from the European Investment Bank. With a start on site due in the spring, it is essential that funding becomes available quickly.

Original print headline - Dear Alistair