EU Referendum: Where does the “Brexit” leave the construction industry?

We now have the results of the EU Referendum confirmed: the UK has voted to leave the EU, by 52% to 48%.  In the immediate, sterling has tumbled and the stock markets have plummeted.  The question now is what impact this will have on the construction industry.

There are many factors at play, but the greatest risk is the uncertainty we now face for months and years to come.  There will of course be negotiations as to the terms of the UK’s departure, taking up to two years, and transitional provisions easing the UK’s exit from the EU.  We don’t yet know however what the outcome of these will be, or the timescale on which they will take place.  David Cameron has announced he will stand down as leader of the Conservative party in 3 months’ time, with a new leader and Prime Minister in place before the party conference in October, and that Article 50 (commencing exit negotiations) will not be invoked until then, but beyond that we have no schedule.

Some of the key risk factors for the construction industry are:

• Workforce: Many construction workers in the UK are migrant workers, particularly from continental Europe, and with a pre-existing labour shortage, losing the free movement of workers across the EU will have a huge impact on the UK’s construction work force. Even if they are allowed to stay in the short to medium term, EU workers may find themselves subject to the minimum £35,000 per annum income threshold.  As with all other UK taxpayers, they may well see an increase in income tax, which could encourage them to leave before they are required to, further draining the industry’s workforce.
• Imported materials: A study from the Department for Business, Innovation and Skills in 2010 showed that 64% of all construction materials imported into the UK came from the EU. Not only will losing the free movement of goods across the EU hamper this, but also the uncertainty of what will happen in the negotiation of the UK’s exit from the EU, and what terms this will be on, will continue to cause the value of sterling to fall, effectively raising the price of all imported materials.
• Implementation of EU policies: There is now a big question mark over whether the industry should still be working towards the implementation of various EU policies, including the critical carbon reduction energy policy, and if so on what timescale. The government needs to take the lead and offer guidance on this critical issue,
• Foreign investment: The uncertainty of what the future holds will also inevitably effect foreign investment into the UK. Many businesses have made their base in the UK and use it as the centre of their global business.  There is a real risk some of these will withdraw from the UK.  On the opposite side of the coin, however, the low value of sterling may encourage non-EU international investment into the UK.
• EU funding: In addition, investment from EU companies and other funding sources (such as the £1.4m awarded only on Wednesday this week to two housing associations for the roll-out of a Dutch energy-saving scheme) is likely to dry up, as the UK’s departure from the EU will destabilise economies in Europe for the foreseeable future. This is reinforced by the calls in already from The Netherlands, France and Sweden for referendums on their EU membership.
• Legal changes: Finally, there will be significant changes required to standard form contracts and documentation, given that in the months and years to come tens of thousands of domestic laws which are based on or assume the existence of applicable EU law will need to be reviewed and amended. Among other areas, public sector procurement is likely to change dramatically, and the laws on intellectual property – of particular relevance to designers – could be rewritten.  This may well delay the publication of the JCT 2016 edition, which was scheduled to roll out updated standard forms for all JCT contracts over the next few months.  For example, one of the key likely amendments across all the standard forms was to incorporate provisions of the EU Public Contracts Regulations 2015.  What of those intended amendments?

Construction professionals should not lose hope, however.  It is likely that the transitional provisions will be phased, preventing an immediate drain of resources, and the currency and economical position may well stabilise once the initial shock wears off.  Even if sources of EU funding are no longer available, there will still be opportunities for international investment through initiatives such as Clarkslegal’s own Commonwealth Environmental Investment Network (www.theceip.com), which up until now have been overlooked.

In the long term, the industry will survive and may even thrive with a greater emphasis being put on training and recruiting within the UK, and drawing on untapped talent and investment from countries outside the EU, to include those within the Commonwealth, benefitting from common structures of legal systems.

Clarkslegal will be monitoring the position and providing regular updates as this new era progresses.  In particular, we have excellent Commonwealth and other international links including, for example, through our membership of TagLaw (www.taglaw.com), if you are interested in exploring this avenue.  If you have any specific questions or concerns on how the “Brexit” will affect your business or your planned projects, please get in touch.