As the foundations of the economy begin to crumble under the onslaught of the coronavirus crisis, it is the construction industry that is posing one of the biggest challenges for the government.
[Owl noticed that David Ralph, Chief Executive, Heart of the South West (HotSW), appeared on BBC Spotlight to say that he had done some modelling on the impact the lockdown might have on our local economy – given the past performance of HotSW, Owl did not find this reassuring. Past strategies have featured build, build, build.]
Louisa Clarence-Smith www.thetimes.co.uk
Closing big construction sites nationwide “would have a significant impact on the entire supply chain and would result in many firms facing financial difficulties within days or weeks”, the government has been warned in an official briefing seen by The Times.
The document, prepared by officials at the Department for Business, Energy and Industrial Strategy, highlights the dilemma facing the government. It is trying to balance efforts to protect the economy with growing disquiet about exceptions to rules that everyone should work from home.
Photos of construction workers packed on to public transport or failing to follow social distancing guidelines on sites have led to calls from the public and politicians for the industry to be shut. However, Downing Street has so far refused to lockdown a sector that accounts for about 7.4 per cent of the national workforce and 8.6 per cent of GDP.
Construction activity is closely correlated with overall economic activity but is three times more volatile, according to the government’s briefing. Therefore, a fall in UK GDP of 0.6 to 2.5 per cent would imply a 1.8 per cent to 7.5 per cent impact on construction.
The industry has been under pressure since the collapse of Carillion, the public sector contractor, in 2018. In contrast with housebuilders, which have been enjoying fat profits in recent years, contractors have low profit margins and are particularly exposed to a slowdown in activity.
Despite the official guidance that construction work can continue, building activity is already slowing down. Work has been suspended on 1,945 sites, which represent a quarter of the UK’s total and have a a combined value of £104 billion, according to Glenigan, a data provider. Huge infrastructure projects, including HS2 and Crossrail, are largely silent. Taylor Wimpey, Persimmon and Barratt Developments, Britain’s three biggest housebuilders, have said that they are closing sites.
Tom Hall, chief economist at Barbour ABI, an industry information provider, said: “Construction firms, expecting a windfall of public investment after March’s budget a few weeks ago, are now plunged into a period of slowdown and uncertainty.
“While the Treasury’s support package for firms, employees and the self-employed is welcome, it remains to be seen how effective it will be in stopping many firms across the construction industry from going to the wall if the crash in construction activity continues for a protracted period.”
The contagion has spread to the supply chain. Brick and paint production in Britain “has now been halted entirely for the duration of the current restrictions”, according to the government briefing.
Costain, Laing O’Rourke, Galliford Try and Kier, among the most prominent of Britain’s commercial construction groups, have all announced cost-cutting measures this week as they scramble to preserve cash. The Federation of Master Builders has warned that “hundreds of small builders face lost earnings, having to make their staff redundant and seeing their companies go to the wall”.
The business department is planning to boost the industry through measures such identifying critical projects that must proceed and issuing guidance to local authorities to bring forward local infrastructure works.
However, Jonathan Hutt, construction disputes partner at Taylor Wessing, the law firm, said that it would be a “major challenge” to keep a targeted sector working while the rest of the economy was in deep freeze.
“Labourers need assurances that they can travel and work safely and that it is right for them to do so,” he said. “Contractors need to know they will have support to access vital equipment and materials, particularly where the project has been run on a just-in-time model or relied on international deliveries. The government will also need to support the industry by encouraging liquidity and access to the legal system throughout this difficult time.”
Mid-sized construction companies fear that they will be abandoned by their banks and unable to access emergency loan schemes as their cash runs out, leaving them facing disaster.
Behind the story: Builders fear cash crunch
Corporate treasurers in the “stranded middle” — builders with annual sales of £2 billion to £3 billion — fear that a cash crunch is looming because the sector is considered high-risk.
Many do not meet the criteria for emergency schemes. The Treasury’s business interruption loan scheme is for companies with sales of up to £45 million and the Bank of England’s Covid-19 corporate financing facility requires an official investment grade credit rating.
Caroline Stockmann, chief executive of the Association of Corporate Treasurers, said: “The construction sector is feeling very vulnerable because of their history, [the collapse of] Carillion and so on.”
Banks are offering business interruption loans, which are 80 per cent guaranteed by the state and interest-free in the first year, that can revert to interest rates of up to 20 per cent after 12 months. Separately, the Bank is reviewing whether to loosen its investment grade requirement to include banks’ own internal ratings.
Construction companies want a separate loan scheme or a broader “bank agnostic” scheme that could be run by the British Business Bank to avoid the punitive interest rates that they fear they will be charged.