Darren Quincey MCIOB and Donald Loe MCIOB are agreed on what they want for their business, but divided on which party has the policies to deliver it. Like most construction firms in Northampton, QS and project manager FK Howard has been reshaped by the recession – a slimmer workforce is dealing with a smaller workload, and more competition has meant a shift to smaller projects. So what the two directors want to see above all is a return of confidence – a feel-better factor that will encourage banks to lend and clients to commission.
“We’ve been involved in private projects, then the client said ‘no I don’t think I will after all’. For instance, a private school wanted to fund a scheme by selling land for housing. With the state of the market, it didn’t go ahead,” says Loe, one of six directors who led a management buyout 18 months ago. “We’ve had a lot of repeat business that underpins our workload, but the problem is getting the new work. We don’t have a full order book for the year ahead, we need different jobs to top it up.”
But with the three main parties all promising an age of austerity, where will the confidence these directors crave come from? Quincey believes the first step is a dose of fiscal reality for debt-laden UK plc, creating a baseline for banks and investors to rebuild from. So although he acknowledges there’s not much in it, he’s leaning towards the Conservatives. “If you put a bigger stimulus in, then you’re not reducing debt. So do you go for instant gratification, or the tougher approach? My feeling is that dealing with the root problem will generate more money in the future.”
On the other hand, 60-year-old Loe is putting his faith in Labour being able to maintain slightly higher spending that would cushion the economy and let GDP growth gradually gather strength. “My view is that historically, socialist governments have invested more into hospitals and schools, so it seems more likely there’s more chance of keeping the industry going. In the seventies, after the government clamped down on public spending, the economy dipped down again,” he says.
Not surprisingly, the spectre of public spending cuts dominated the agenda for the construction professionals CM met in Northampton. Along with the rest of the industry, the fate of FK Howard, Chartered Building Company Steele & Bray and mid-tier contractor GB Building Solutions, will be closely tied to decisions on education, housing, health and infrastructure taken in Downing Street. As in the rest of the country, business issues will guide voting choices. “We don’t think on a personal level. It’s “which party is most likely to enhance our business?’” says Loe.
Firmly located in Middle England, Northampton is classic “swing” territory that could determine the outcome of the election. The two major parties hold one seat each – Labour’s Sally Keeble in Northampton North and the Tory’s Brian Binley in Northampton South – while a newly-created third seat offers everything to play for. It’s a designated housing growth area, but there has been precious little house growth in the past two years. With few major employers, the region is characterised by local businesses employing local people, with considerable representation from construction.
So it’s perhaps not surprising that the issue that came second to spending cuts was frustration from local businesses competing on a playing field driven by national rules: OJEU-style tendering, frameworks, pre-qualification questionnaires (PQQs), strategic development plans. While these might make sense when viewed from Whitehall or the boardroom of a major construction plc, they take on a different perspective at grass-roots level. Whether or not they considered themselves Tory supporters, many of the Northamptonites were in tune with the Conservatives’ “localist” line that decision-making often needs a more local touch.
Take Steele & Bray, a Chartered Building Company with 23 employees, which finds itself in very similar position to FK Howard. Its turnover has fallen sharply since the long-gone days of “endogenous growth”, and the average size of its projects has dropped by 50%. “I’ve spoken to a lot of local contractors, and a lot have seen turnover almost halve, they’ve had to cut rates of pay for staff and workers. A second hit for public sector cuts would leave many contractors with not much scope for survival,” worries director Steve Burditt MCIOB.
Both firms have found themselves squeezed out of their traditional markets, as larger companies prop up turnover by tendering for ever-smaller projects. “They’re coming here from all over the place!” says Burditt. At FK Howard, Loe reports that the firm’s bid to project manage a nearby council leisure centre was placed second – to Shard project-manager Mace. “They came in with a keen price because they had other work in the area,” he shrugs.
But both also feel disadvantaged by ongoing trends in public sector procurement. Until recently, working for local authorities was a question of making it onto an Approved List. When jobs came up, invitations to tender would be rotated, ensuring that the public purse was shared out fairly. But recently, there have been two policy shifts. First, bundling work into framework deals – preceded by ever more onerous PQQs and compliance checklists – tends to favour larger firms with the resources to clear bureaucratic hurdles. Second, even small-scale work outside the frameworks is now being tendered according to the same rules and procedures as high-value contracts.
Burditt has tracked the changes. “Twelve months ago, we were still getting enquiries from public sector clients. But now the councils and public sector bodies are following an OJEU-aligned system for advertising contracts worth as little as £100,000. So if they’re looking at 30 submissions, it transpires that the smaller [qualifiying] contractors won’t get far.”
When Steele & Bray took the problem to local MP Sally Keeble, it received a sympathetic response, although ultimately she chose not to fight a battle with Northampton Borough Council on Steele & Bray’s behalf. “Our local council said they couldn’t be seen to show any preference for local contractors, but our MP said that wasn’t true – notices can be issued and written so that local contractors can be given the opportunity to compete,” he says.
Not surprisingly, he’s hoping that a new government will reform public procurement to recognise and reward the expertise of smaller, local contractors. “Once, we were excluded on the grounds that our carbon footprint was too big – but we’re a local business employing local workers!”
Burditt might feel no one’s fighting his corner, but there are government support systems available. Northampton is the current base of the construction iNet, a project co-funded by the East Midlands Development Agency and others to help construction SMEs expand through “green” innovations.
But Charles Meynell, senior adviser at iNet, is not surprised that Steele & Bray hasn’t been in touch. “A lot of SMEs are under so much stress that they’re finding it difficult to engage with government bodies – there’s so much bureaucracy involved,” he says. “There’s scepticism about government agencies. Business Link has some good advisers, but a lot of them offer very bland stuff.”
Prospects locked up
The iNet offers its SME clients support, contacts with academia or other businesses, and modest grants. Meynell, a one-time director of housebuilder Countryside who formerly ran his own small business, firmly believes in the enterprise and employment prospects locked up in construction SMEs. “If I’d had an iNet when I was running a business, I probably wouldn’t be sitting here now! The iNet is a good way of clustering ideas and the power of the network.”
But he finds himself in a political quandary. Meynell is a Tory councillor (in north-west Leicestershire), whose party has made public pronouncements about disbanding the RDAs – seen as being unwieldy and insufficiently responsive to local conditions. In response, Meynell treads a careful path. “I think the disappearance of EMDA would have a negative impact. Councils don’t have the resources and staff to deliver what EMDA does. But it would be right to have its far-reaching and Stalinistic strategic planning powers curtailed.”
Another body the Conservatives would like to shrink is the Homes and Communities Agency, the amalgamation of English Partnerships and the Housing Corporation. EP promoted the first phase of Upton, a 1,380-home urban extension, where a range of developers built homes to an overall design code. But after 650 were built – including the first Code 6 homes for private sale – the recession hit.
But later this month, HCA project manager Erica Davies is inviting housebuilders, developers and contractors on the HCA’s new Delivery Panel to the site, to see if they can propose workable development deals. The catch is that while the local authority will require 30% affordable housing, it’s unlikely that grant funding would be available. Instead, the HCA sees Upton as a pilot for a new approach where the developers would pay for the land on completion rather than up front.
“Previously, EP sold the land on a lease, and the Housing Corporation gave developers grants for affordable housing. But the type of funding deals we’re talking about wouldn’t have been possible when there was more than one agency involved,” says Davies. For her it’s an example of the integrated thinking that could be at risk if the HCA has its remit reduced. “Our best argument is delivery [of affordable housing], and that’s what we’ve been doing.”
And asked what she thinks of Conservative plans to link planning permission to financial incentives for local communities, her response is indirect but reveals her feelings. “If you leave it to the population in general, does the population in general want more housing?”
New sources of work
Reform of the planning system is also an issue for the final interviewee in CM’s Northampton visit. Peter Stone MCIOB, regional managing director of GB Building Solutions, is overseeing the region’s largest project – a £42m secure mental health facility for the St Andrew’s charity, a provider to the NHS. But the contractor is having to look beyond the publically-funded health and education work in today’s order book to new work sources to fill tomorrow’s, including taking on a developer role in retirement communities for the “baby boomer” generation.
As a result, the firm is keeping an eye on the Tories’ plans for planning. “Looking at developments in hotels and care homes links us into the fundamentals of the housing market, including land supply. There are fundamental pressures on the market, so looking at ways of relaxing the planning regime seems to make sense, as long as the pendulum doesn’t swing too far.”
GB Building Solutions is also looking to possible revenue streams that will flow from the parties’ “pay as you save” plans, and hopes to see new financial mechanisms fund road, rail and energy schemes. “Investing in infrastructure does have long-term payback – think of what the Victorians did. There’s the ability to attract private equity investment, perhaps with an infrastructure fund.”
Like the rest of the interviewees, Stone is realistic about the poor prospects for public sector work, and acknowledges that the years of plenty won’t return. So the best Northampton is hoping for – and voting for – will be a government that creates the possibilities for construction to move on. A fair competitive playing field; a return to healthy levels of lending; a commercially realistic planning system; new workstreams in housebuilding, infrastructure and residential retrofit. Surely that’s not too much to ask for?
Labour has said it will protect spending on schools but has not ruled out cutting the budget for other areas, such as higher education. There will certainly need to be cost savings in areas such as energy efficiency, which could bring demand for retrofitting existing schools and a continuation of the sustainability drive towards zero-carbon schools through the government’s flagship BSF programme. The government has given a Treasury commitment to maintain the BSF programme through to 2011 and a political commitment to continue if they are re-elected. It is unlikely they will change the mechanics of BSF so it will remain a PFI programme. There could, therefore, be some positive opportunities for the construction sector from continued secondary education investment. Unfortunately, however, last year’s Learning & Skills Council (LSC) funding fiasco, which left colleges up and down the country in the lurch over funding promises, is unlikely to be met by a renewed commitment to capital investment in further education.
The Lib Dems have promised an extra £2.5bn for schools to give every child a fair start and help cut class sizes. It also plans a school insulation programme to improve the energy efficiency of schools. The party will invest £400m in interest free loans for schools to make energy saving renovations. The programme will create an estimated 9,600 jobs.
The Conservatives would move away from the Building Schools for the Future (BSF) model for education investment because they claim the procurement process is too bureaucratic, costly and wasteful. So far the Tories have committed to honouring BSF projects that already have financial close but they will give no guarantees beyond that. Of course, if BSF is curtailed this could have major implications on the certainty of the construction pipeline in this sector. The small-scale build and conversion model that the Tories appear to be embracing will generate some capital investment but nowhere near as much as the £45bn envisaged in the BSF programme. At the same time, the Scandinavian model of “free” education would be introduced, allowing private individuals or those unhappy with the local school offering to apply for state funding to set up a new school.
“Socialist governments have invested more into hospitals and schools, so it seems more likely there’s a chance of keeping the industry going.”
Donald Loe, FK Howard
“If you put a bigger stimulus in then you’re not reducing debt. So do you go for instant gratification or the tougher approach?”
Darren Quincey, FK Howard
“A second hit for public sector cuts would leave many contractors with not much scope for survival.”
Steve Burditt, Steele & Bray
The Conservatives are will reserve public funds to focus on day-to-day operations. Hospitals will therefore be expected to seek private finance to pursue capital programmes. Unfortunately, with Glenigan’s recent report finding that more than 100 school and hospital projects worth nearly £2.4bn had been affected by lack of private funds, unless banks start lending again, the sector could face a crisis. As the Tories favour PFI as a model for delivering capital investment in the health sector, it is unlikely we will be seeing an alternative approach. This suggests that the prospect for any major hospital building project coming on stream is slim.
The health secretary responded to the chancellor’s call for efficiency savings in his pre-election Budget by offering savings on the cost of procurement, IT, energy consumption and by reducing staff absence. There is no indication of what the government’s plans are beyond 2010-2011 pending the outcome of the Election and a potential late autumn spending review. Again, retrofitting existing assets will be required to meet ambitious cost savings, but there is little scope anticipated for any capital spending in this sector beyond that committed to existing public-private partnership-led Local Improvement Financial Trust (LIFT) programmes.
The Liberal Democrats pledge to help save more than £500m a year and make the NHS “fit for the difficult times ahead”. This would be achieved through a fundamental shift away from central bureaucratic control to local accountability and responsibility, and better use of financial leaders to achieve key policy objectives. The Department of Health would be cut by half, strategic health authorities scrapped and quango chiefs’ pay would be capped to the same rate as the prime minister’s salary.
The Tories have made it clear that they are in favour of high-speed rail, expansion of regional airports (but not a third runway for Heathrow) and a trimmed-down Crossrail project. They also recognise the need to modernise the country’s creaking energy and utilities infrastructure to meet the challenges of climate change and energy security. This sector appears to be the most ripe for growth and capital investment and the one which the construction sector should have most to benefit from. It does, however, remain to be seen if the Tories are willing to commit funding to potentially rich opportunities for the construction sector, such as renewable energy, retrofitting existing homes, supporting community energy and heating projects, and nuclear infrastructure.
In keeping with the Keynesian approach to “spending our way out of the recession”, Labour is committed to investing in transport and utilities infrastructure as a means of creating jobs. The upgrading of the existing networks, and this week’s budget proposals for the creation of a Green Investment Bank, will also help to meet challenging climate change targets. Infrastructure UK (announced by the government back in December) is already focusing on identifying new revenue streams for major infrastructure, advising the Treasury and Department for Energy and Climate Change (DECC) on the investment needed to make the transition to a low-carbon economy. This will involve investment in clean electricity and carbon capture so there could be opportunities here for construction. The £1bn Green Investment Fund is geared towards sustainable transport and energy projects, but is seen by many critics as a drop in the ocean of the investment required to implement the infrastructure required to reduce UK carbon emissions by 80% by 2050. In terms of major schemes the government remains committed to its growth areas such as the Thames Gateway as well as Crossrail and High-Speed Rail links.
The Lib Dems are discussing a United Kingdom Infrastructure Bank (UKIB), a new route to provide capital, guarantees and equity to infrastructure projects. A national infrastructure bank could provide finance in the same way that the European Investment Bank (EIB) currently does but on a larger scale, and specific to the UK. The EIB has helped provide new rolling stock for London Overground; enhancements to the DLR; and support for the construction and operation of offshore wind farms.
Labour is quick to claim that it acted swiftly and decisively in addressing the impact of the recession on housing. Initiatives include the Homes & Communities Agency (HCA) “kickstart” fund for helping building sites stalled by the recession. However, there is still a chronic level of uncertainty within the market with developers and lenders reluctant to take on the risk. There are some signs of development coming forward, but until uncertainty eases, lending resumes and a new model of housing delivery materialises, there is little scope for major housebuilding schemes of the like seen before the recession. Some would say this is no bad thing as long as we learn the lessons of the poor quality, quick-fit, sell-them-cheap model that Labour presided over in the last decade. Construction needs to lobby for a model that values quality and craftsmanship and will deliver greater returns. There is unlikely to be a shake-up of the planning system, as is advocated by the Tories, but instead a concentration on planning process efficiency and championing of the Community Infrastructure Levy (CIL) to support affordable housing. There will also be a focus on retro-fitting and the delivery of sustainable energy efficient new housing.
Housing is where the Tory mantras around localism, devolved decision-making and private finance seem to crystallise. Under proposals contained in their Planning Green Paper, communities will have a right to decide over whether housing development will go ahead in their area. The Community Infrastructure Levy and S106 will be scrapped, leading many to fear that the delivery of affordable housing will dry up completely, since 40% of all affordable housing is currently delivered this way. To counter charges of the proposals encouraging “nimbyism”, the Tories would offer financial incentives to communities and councils that embrace new development, such as matching council tax contributions for each new home for a period of six years. This, they believe, will have communities clamouring for new development. However, there is little in the proposals to suggest how developers will be incentivised to build new homes under such a new planning system given features such as third party right to appeal. Critics have reacted to this fiercely, believing that it would lead to chaos in a time when housebuilding is at its lowest level.
To improve the carbon efficiency of existing housing stock, the Lib Dems propose the renovation of 250,000 empty homes, funded through grants or cheap loans. Grants would be offered to social housing tenants, and loans to owner-occupiers. It also plans an “eco-cashback” scheme to give people £400 towards energy efficient home improvements and small energy generation projects. People will be able to apply for the cash to help pay for double glazing, boiler upgrades and micro generation such as solar panels and domestic wind turbines. The scheme would create 8,000 new jobs.