Project Fear is over but the aftershocks will not only impact heavily on UK economic growth, but also on any foreseeable infrastructure developments due to the uncertainty created by the Brexit vote to leave, an industry source has warned.

Osborne Said “It Is Very Clear That the United Kingdom Is Going to Be Poorer,” on a BBC Radio 4 Programme.

The assumed time frame for the UK-EU divorce terms to be agreed is two years which has left many businesses anxious and investors unclear of what the future may hold.

The Knock-On Effects of the Brexit Vote

All Brits must now confront the truths about the forthcoming EU DIVORCE. Don’t kid yourself. Separation always harms both parties. However, what does this mean for investment in the capital project wise? Well, the Brexit verdict will impact construction projects as follows.

1. Access to Foreign Labour

The first most important issue is access to labour.  A core principle of the EU is the right of free movement, which has made immigration between member states somewhat easy and stress-free. The construction industry relies heavily on overseas workers to fill both skilled and non-skilled job roles, and a significant percentage, predominantly within the London market, come from continental Europe.

“Across the UK, Nearly 12% of the 2.1 Million Construction Workers Come from Overseas, Official Statistics Indicate Largely from the EU.”

It’s logical that with an EU DIVORCE those skilled individuals will instead travel to France, Germany, or Spain, where the right of free movement still exists.

David Thomas, chief executive of Barratt Developments Plc the UK’s largest homebuilder said, “an EU DIVORCE would lead to shortage of construction staff, and impair the UK Construction Industries ability to build houses.”

The free movement of labour in the European market has been seen as a positive for many. However, it’s also possible that a skills shortage may result in increased investment in training and upskilling of local workers to fill the gaps. This could also result in higher wages being demanded by those workers who are in the UK labour market which individual labours would no doubt welcome, but which in turn could escalate the cost of projects.

Migrant construction workers who have arrived in the UK in the past 10 years. – Construction Industry Training Board (CITB) 2014:

Poland: 30,120
Romania: 24,842
Lithuania: 7,569
India: 7,704
Bulgaria: 5,443
Latvia: 3,830
South Africa: 1,316
Hungary: 1,448
Australia: 937

2. Investment in the Capital

Another major concern is investment in the UK. The EU presently makes it easy for companies in different countries to do business with, and invest in, one another.

European manufacturing giants Airbus has voiced concern about investing in an independent UK. Likewise German firm Festo has said German companies should be cautious about investing in Britain. And let’s not forget that Germany is the financial driving force of the EU.

On the other hand, Lord Bamford, the Chairman of JCB is however persuaded that a the eventual EU DIVORCE could reduce the costs of administration so much so that the costs of leaving the EU will be covered.

3. Prestigious Projects

An enormous question mark hangs over prestigious projects such as a third runway for Heathrow which has now been delayed again in wake of Brexit fallout and the Hinkley Point nuclear power station in Somerset which is now “extremely unlikely”.

 

A render of the proposed Hinkley Point C nuclear power station.
A render of the proposed Hinkley Point C nuclear power station.

There are also growing suspicions about the future of less well-known operations such as the London Gateway port in Essex, operated by Dubai’s DP World, which opened in 2013 and is still only half complete.

This new outbreak of ambiguity is also likely to engulf many other scheduled construction projects in the UK.

4. EU Legislation and Regulation

A significant amount of EU legislation is now rooted in UK law and affects construction. The EU DIVORCE would not instantly result in less regulation. By way of example the CDM regulations basically enacted EU Directive 1992/57/EEC and there is no indication that the regulations or health and safety in the construction cycle will be swept away because of the leave vote. The UK may now choose to reduce the scope of this and other dictates or, abolish them completely. However, one thing is for sure, this will not happen overnight.

5. Imports and Exports

The supply of goods and services for the construction industry is a key driver of growth in the UK. The UK is at least partly dependent on imports from the EU, particularly Germany, Italy and Sweden.

In 2014, 53% of Goods and Services Were Imported into the UK from the EU.

The degree to which these may be affected depends upon the post-Brexit model.

6. Exchange Rates

Can Sterling’s Recovery Continue with Brexit Looming? From the moment the EU leave vote was announced, the Pound Euro exchange rate has been volatile.

Pound Euro Exchange Rate Reaches 1.2150 – Half-Way Recovered to the Week’s Opening Levels

In a trade where margins are tight, there is heavy dependence on the import and export of goods and services, currency fluctuations will have a major fiscal impact on construction projects. Whereas the inclusion of exchange rate phrases in constructions contracts is always an option, it does mean companies will need to undertake an additional level of strategizing, prior to planning or otherwise undertaking construction projects in the immediate future.

7. Access to Finance

The availability of money is often a pre-requisite for construction projects. Access to money can control whether or not a specific projects can proceed from design to construction.

Currently UK small and medium enterprises have access to SME financing which will at some point no longer be available once the EU DIVORCE is complete.

Standard & Poor’s stripped Britain of its “AAA” credit rating reducing it to “AA”. Fitch Ratings also downgraded its ranking for Britain’s creditworthiness by one notch.

It is therefore clear that the UK’s connection with the EU enhanced its creditworthiness. The looming EU DIVORCE is quickly changing all that. The cost for developers of finding finance for construction projects will no doubt also increase as lenders seek to impose higher interest rates.

The results of an imminent EU DIVORCE are complex and widespread and something that the wise business should be planning for now. There will be significant insecurity for businesses in the months, if not years, resulting from the vote to leave.

 

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