Spending Review 2010: construction industry implications

The implications of the government's Comprehensive Spending Review October 2010 for the construction and engineering industry, and the industry's reaction to it.

PLC Construction

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On 20 October 2010, the Chancellor of the Exchequer, George Osborne, set out the government's four-year public spending plans in its Comprehensive Spending Review 2010 (SR 2010) ...show full speedread

On 20 October 2010, the Chancellor of the Exchequer, George Osborne, set out the government's four-year public spending plans in its Comprehensive Spending Review 2010 (SR 2010). He said the government had chosen to spend on health, education and infrastructure and to cut waste and reform the welfare system. In addition, he said the government needs to invest in transport, green energy infrastructure and sciences. Its aim is to eliminate the structural deficit by 2015.

Although few of the announcements were aimed specifically at the construction industry, the indirect consequences of many may be substantial. As Mark Goodwin of the RICS commented:

"The property and construction sector will certainly feel its share of the general pain, and when this sector hurts, the whole economy hurts more."
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Contents

Background to the SR 2010

On 20 October 2010, the Chancellor of the Exchequer, George Osborne, set out the government's four-year public spending plans in its Comprehensive Spending Review 2010 (SR 2010).

The SR 2010 was preceded by the June 2010 Budget, which set out the overall level of public spending for the four years from 2011/12 to 2014/15. The SR 2010 now sets out the allocation of these resources across all government departments, according to the government's current priorities. The budgets announced for each department are fixed but departments have the power to decide how best to manage and distribute the money within their areas of responsibility.

The June 2010 Budget also announced that public spending, not taxation, would see the most dramatic reforms to reduce the deficit, with public spending £83 billion per year lower at the end of this spending review period (taking inflation into account).

The SR 2010 follows the government's announcement that quasi-autonomous non-governmental organisations (quangos) are being reformed (see Blog post, Bonfire of the quangos).

This note looks at areas in the SR 2010 of primary interest to construction and engineering lawyers. For analysis of other aspects of the SR 2010, see Legal updates:

For more information on the June 2010 Budget, see:

 

Apprenticeships

The SR 2010 announced an increase in adult apprenticeship funding by £250 million a year by 2014-15 relative to the level inherited from the previous government. The aim is to have a skilled workforce that can support growth and productivity. No details of where the funding will be spent was given.

Industry reaction

Richard Diment, director general, Federation of Master Builders (FMB)

"The boost for more apprenticeships does offer some real hope for those seeking to learn a skilled trade. However, employers in the construction sector will want to be convinced the economy is strong enough to take on new trainees."
 

Capital spending

The government has identified those projects with the highest economic value. To ensure those projects are adequately funded, it has increased capital spending by £2.3 billion a year by 2014-15, relative to the June 2010 Budget. This means capital spending will be at £51 billion, £49 billion, £46 billion and £47 billion over coming years.

It has been reported that if the construction industry receives the same proportion of capital spending as it did in 2009-10 (41%), the industry will see £3.5 billion more of investment than it had expected over the next four years.

Industry reaction

James Wates, chairman, UK Contractors Group (UKCG)

"It would be all too easy to lament the fairly draconian cuts announced today in capital spend. But they were not unexpected and there seems to be some £3.5 billion extra for construction over the next four years than announced in the emergency budget."

Stephen Ratcliffe, director, UKCG

"It is a bit better than expected... However, much of the detail is yet to come. We really need clarity."

Fiona McDermott, UK head of building and construction, KPMG

"The Chancellor has announced today a further £2 billion capital investment beyond the commitments made in the emergency budget in June. A sweetener perhaps for what will inevitably be a difficult period for the construction industry."
 

Education

Education (along with health and infrastructure) is an area the government has chosen to focus on. The SR 2010 announced:

Industry reaction

Graham Watts, chief executive, Construction Industry Council

"Social housing is the worry but investment in schools, carbon reduction and transport infrastructure plus [the] Green Investment Bank are positives."

Mark Goodwin, director of external affairs, RICS

"Cuts like [a 60% reduction in spending on the construction and refurbishment of schools] risk endangering the hugely important construction sector – every £1 spent by the Government on building projects generates around £3 for the wider economy. Cutting construction spending will have serious negative impacts including long term unemployment, loss of skills and outdated infrastructure preventing economic growth."
 

Infrastructure projects and transport

Infrastructure remains a priority for government. The SR 2010 announced:

  • Infrastructure spending will be £2 billion higher than was set out in the June 2010 Budget. This will avoid cuts to projects designed to help boost growth and reverses cuts outlined in June.

  • £30 billion will be spent on transport projects over the next four years, including:

    • £14 billion for Network Rail, including major improvements to the East and West Coast Main Lines;
    • widening of the M25 in ten places;
    • funding to enable Crossrail to proceed (although it has subsequently been reported that the central station will open in 2018, a year later than originally planned);
    • £6 billion for upgrades and capital maintenance on the London Underground network; and
    • M62 expanded.
  • Plans to deliver a new high speed rail network from London to Birmingham, and then to both Manchester and Leeds, will continue. The government will bring forward legislation during this parliament to allow the project to proceed.

  • Investment in flood and coastal erosion risk management will continue, with £2 billion being spent over the next four years.

It was announced that Secretary of State, Philip Hammond, will unveil more details on transport, approved projects and the national infrastructure plan next week.

Industry reaction

Michael Ankers, chief executive, Construction Products Association (CPA)

"We knew this was going to be a difficult review as far as construction was concerned. However, the Chancellor has acknowledged the important role that capital spending on construction can play in helping to provide for a private sector-led economic recovery. In particular maintaining transport investment at £30 billion over the next four years will sustain employment and help encourage private sector investment."

A Network Rail spokesman

"Network Rail is pleased that the government has recognised the need for sustained investment in infrastructure for a rail network that continues to attract more passengers."
 

Low carbon economy and Green Investment Bank

The government will continue to invest in the low carbon economy, including investment in low carbon technologies. The SR 2010 announced:

  • Funding (up to £1 billion) for one of the world's first commercial-scale carbon capture and storage demonstrations on an electricity generation plant.

  • £200 million for the development of low carbon technologies including offshore wind technology and manufacturing at port sites.

  • £860 million to support households and businesses investing in renewable heat measures.

The SR 2010 also confirmed funding for a Green Investment Bank (GIB), with £1 billion of funding (the government hopes there will be more to come from the private sector and future sales of government assets). This will provide finance for green infrastructure projects that the market cannot tackle adequately. For more information on GIB, see Legal update, A blueprint for the Green Investment Bank (www.practicallaw.com/8-502-8405).

Industry reaction

Chris Huhne, Energy and Climate Change Secretary

"[My department] is playing its part in tackling the deficit. Like the rest of the public sector we have taken some tough decisions, but we remain on course to deliver on our promise to be the greenest government ever. We will help create green jobs and green growth – and secure the low carbon investment we need to keep the lights on."

John Alker, director of policy and communications, UK-GBC

"The £1 billion for the Green Investment Bank, delayed until 2013/14 is disappointing. This is not as much as was hoped for. But the devil is in the detail. The Bank needs to be able to leverage the necessary private sector finance to meet both climate change targets and boost job creation in the construction sector. The Bank could be a major vehicle for getting private sector finance into the 'Green Deal' for energy efficient homes and buildings."

Mark Goodwin, director of external affairs, RICS

"RICS believes plans for a Green Investment Bank will need much more than the £1 billion allocated in the [spending review] to be successful in leveraging the necessary private sector investment in the low carbon economy."
 

Social housing shake-up

The government wants to make social housing more responsive, flexible and fair so that more people can access social housing in ways that better reflect their needs. The SR 2010 announced:

  • £4.4 billion funding for social housing (which is a cut from £8.4 billion between 2008/11).

  • Housing associations will be able to charge 80% of market rent to new tenants, with the aim of funding 150,000 new social homes.

  • More modest capital investment in social housing stock.

  • The planning system will be reformed and a New Homes Bonus will be introduced to support economic growth and increase housing supply.

Industry reaction

David Eastgate, chief executive, Hyde Group

"The priority is now for providers to be innovative in financing the building of new homes and providing support services that help people adversely affected by spending cuts."

Jennet Siebrits, head of residential research, CB Richard Ellis

"The housing industry has been preparing itself for the worst for some time, so while the cuts outlined today are not welcome, nor are they a surprise. Cuts to the social housing budget do not inevitably have to cause a cataclysmic decline in the number of affordable homes built each year. There is now an opportunity for the private sector to step in and provide suitable housing where it is most needed."

David Orr, chief executive, National Housing Federation

"The fact that the housing budget is being cut by 60% is deeply depressing – and shows that providing affordable housing is no longer a government priority. Cuts on this scale will come as a devastating blow to the millions of low income families currently stuck on housing waiting lists.
We do however welcome the Government’s decision to give social housing providers greater flexibility as to how they deliver their services."
 

Olympic and Paralympic games 2012

The SR 2010 announced that the public sector funding package of £9.3 billion for the Olympic and Paralympic games in 2012 will be maintained. Although almost two years away, the Olympic Delivery Authority (ODA) has now completed over 70% of the venues and infrastructure programme for the games.

The government announced that it will continue to work with the Mayor of London to ensure the games have a genuine and lasting legacy. This will ensure five major new sporting venues for elite and community use, 2,800 new homes (half of which will be affordable housing) and 250 acres of new parklands.

 

Comment

In making the announcement, George Osborne said:

"Today is the day when Britain steps back from the brink ... It is a hard road but it leads to a better future."

Like all other sectors, the construction and engineering industry has been forced to accept its share of the pain that is necessary to reduce the deficit. In that context, it has already seen some cuts and there seems an air of resignation in the industry's reaction to some of the specific measures announced in the SR 2010. Mark Goodwin, director of external affairs at RICS summed up the reaction:

"The property and construction sector will certainly feel its share of the general pain, and when this sector hurts, the whole economy hurts more."

However, this is not the end of the announcements. Later this year, each government department will publish a business plan setting out the details of its reform plans. In addition, more details on transport and the National Infrastructure plan will be unveiled next week.

 

Sources

 
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