Constructing a way out of recession

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Constructing a way out of recession

Last month we saw the Office of National Statistics revealed that the UK had fallen deeper into recession, as the economy shrank by 0.7% between April and June.  Instrumental to our economic woes is the struggling construction sector, which saw a 5.2 per cent fall in output in Q2, following a 4.9 per cent drop in the previous three months.

Much of the attention about the construction sector has been on housebuilding levels.  Inevitably fewer homes are being built, as normal would-be buyers are turned away by mortgage lenders asking for unattainable deposits in this economic climate.  The Government has tried to facilitate more housebuilding through relaxing planning laws, adopting the controversial NPPF, and promoting initiatives such as the ‘New Homes Bonus’ and the ‘NewBuy Scheme’.

But construction covers a wide range of building projects – from public and private sector housing, to schools, hospitals, roads, bridges and other big infrastructure schemes. Figures compiled by the Construction Industry Training Board (CITB) – show there will be up to a 30 per cent decline in the number of public sector buildings, such as schools and hospitals, being built in 2012. While other infrastructure projects such as roads, bridges and energy plants are also being delayed as confidence in our economy continues to dampen.

The Government understands the importance of facilitating investment in new infrastructure  – as four weeks ago HM Treasury underwrote over £50 billion to jump start stalled infrastructure projects and facilitate the construction on ‘ready or nearly ready’ projects.

But, I believe the key is finding a socially (and financially) responsible replacement/adaption of our Private Finance Initiatives (PFI’s). In PFI’s, instead of the government having to raise/borrow money to build hospitals, schools and roads etc, the private sector raises the money, constructs the building and then carries out its facilities management. Allowing the Chancellor to argue the government is improving public services and infrastructure without having to increase taxes and or levels of borrowing – this was something that Gordon Brown was a particular exponent of under the New Labour government. But the PFI’s come at a cost, and a significant one at that. The private companies who raised the funds, invariably want their money back – with interest!  Furthermore as part of the PFI contract the public sector is forced to use the private contractor to carry out the building’s ‘soft services’, at an extortionate price. A recent government study found that the costs of future commitments under PFI schemes is £131.5 billion – a staggering four times the value of the assets secured through the deals.

Subsequently the government has issued a review to find ‘PF2′ –  a more socially and financially responsible way of facilitating private investment in national infrastructure.  The review is likely to recommend a number of key changes to the PFI’s such as abolishing the requirement to bundle soft services within the infrastructure contracts, having more flexible financing options and a programme may be set up to inform and educate public sector clients in infrastructure procurement and contract management.

The findings from the review, the announcement on which has now been delayed until September, are crucial as they will breathe confidence back into PFI’s – encouraging the private sector, which does have the reserves, to put their hands into their pockets and invest in British infrastructure.  This cannot come soon enough if we are to construct our way out of the recession.

Andrew Todd, Senior Account Executive

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