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Spending Review on construction: This too shall pass

Cecily Davis
25/11/2020

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United Kingdom

Despite promises of major investments in projects, the construction sector has missed out on a direct funding boost in both the Spending Review and National Infrastructure Strategy.
 
On 25 November, the Chancellor of the Exchequer, Rishi Sunak, set out his Spending Review, outlining key provisions for UK construction and infrastructure.

As well as (re)promising significant investment in low-level infrastructure – roads, railways and flood defences – schools, hospitals and housing, the Chancellor announced the much-anticipated National Infrastructure Strategy (NIS), which sets out the government’s plans to "level up" the UK economy and achieve net zero emissions by 2050.

But there is little in either the Spending Review or the NIS detailing how construction companies, who will be relied upon to deliver much of the government's economic recovery and levelling up ambitions, can access the support they need to put these plans into practice.

In its July 2019 "Construction Sector Deal" policy paper, the government acknowledged that "construction underpins our economy and society" and requires "better access to the capital the industry needs to invest and grow".

While Covid-19 has moved the goalposts for many industries, construction continues to be front and centre of the government's economic plans.

Borrowing for the construction sector is expensive, and construction businesses will have been looking to the Spending Review/NIS for an indication that government funding would be made specifically available for construction companies – either in the form of grants or the ability to borrow money at attractive rates, for investing in, among other things, modern construction methods and skills.

UK Infrastructure Bank

One of the headline announcements of the Spending Review was the creation of a new UK Infrastructure Bank, headquartered in the North of England.

This bank will work in partnership with the private sector to finance new investment projects throughout the country.

The government was however keen to stress in the NIS that it will not be re-introducing the private finance initiative (PFI) model for the construction sector.

While a welcome source of funding, the purpose of the UK Infrastructure Bank is to facilitate investment into specific infrastructure projects, rather than into the construction industry itself.

Providing funding to get projects off the ground is not the same as ensuring construction companies have enough money to invest in the new technology and skills they need to meet the government's objectives.

Planning

The government has already committed to simplifying the planning process to help increase housebuilding and revive struggling high streets.

Many in the construction industry will likely take these promises with a pinch of salt, given the frequency of promised planning reforms and the lack of meaningful progress to date.

Changing the legislation is one thing, but resourcing the implementation of these changes is another and one that was not expressly provided for in either the Spending Review or the NIS.

Without urgent investment in local authority planning departments to speed up decisions, projects will continue to struggle to get off the ground.

Local authority investment in commercial real estate

The government has also pledged to reform the Public Works Loan Board (PWLB) lending terms to end the use of the PWLB for investment property bought "primarily for yield", because such investment "presents a risk for both national and local taxpayers".

Any real estate investment is risky, however the government's intimation that local authorities lack the experience and expertise to succeed in such ventures is an outdated view that does not ring true with construction industry professionals.

While public authority real estate schemes have been overshadowed by high-profile failures, such as Croydon Council's ill-fated investment in council-owned developer Brick by Brick, many local authorities have made a success of their commercial real estate portfolios.

Commercial real estate is an easy target at present as a consequence of the pandemic, and it seems unfair to judge councils on the performance of commercial real estate over the past 12 months.

For private sector developers, the PWLB reforms may represent a levelling of the playing field when it comes to accessing development funding, however it is not clear that the measures will support the growth of the construction industry overall.

As a consequence of the pandemic, few local authorities are likely to have commercial real estate investments on their agenda in the near future.

Guidance

The government is facing some extremely tough spending decisions, but it is perplexing why the construction sector, which has been singled out for its economic importance, has not been allocated any direct funding in the Spending Review.

It is also puzzling that, given the NIS' recognition that the UK construction sector needs to be more internationally competitive, the government does not seem prepared to grease the wheels for British construction companies to catch up with their global counterparts.

Britain needs to be an attractive place to invest. The government's industrial strategy requires this, and a well-resourced construction sector is core to achieving that goal.

Taking account of the circumstances and previous experience of the government's approach to construction, it is likely that the latest Spending Review is simply mood music for an especially challenging time.

There is scope for the NIS to be expanded and adapted and construction sector clients should proceed with caution when making decisions in response to this version of the strategy and the November 2020 Spending Review.

While all parts of the construction supply chain will likely be busier as a consequence of the Spending Review and NIS' provisions, without funding support, companies will find it challenging to make the most of the opportunities they will have.

This article was authored by Cecily Davis, construction partner at Fieldfisher.
 

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Areas of Expertise

Construction

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Real Estate