Brexit uncertainty

The referendum held last year in the UK over continued membership of the European Union led to a victory for the leave camp – the Brexit supporters – but 12 months on, the waters of uncertainty seem just as muddy, with more speculation than fact floating around.

The mechanism for the UK to leave the Union has been activated, with UK Prime Minister Theresa May triggering Article 50, but apart from that, little of any real consequence has happened, and in truth, nobody knows what the effect on the UK and on the rest of the EU will actually be.

The UK’s Construction Equipment Association (CEA) staged a conference to discuss the possible outcomes – the Beyond Brexit Briefing.

Chris Sleight, senior consultant at management consultancy Off-Highway Research, gave the conference his view on how the referendum result might be interpreted.

He said it seemed that Brexit supporters were looking for controls on immigration and to stop ceding power to European Courts, accepting laws developed at an EU level, and contributing to EU budgets.

On the other hand, it seems the UK would like to keep free access to the single market, and financial services passporting – which Sleight said was of particular importance to the financial hub of the City of London. Then there are the other three of the “four freedoms” alongside labour, which are the free movement of goods, services and capital, as well as the wish for UK citizens to retain the right to live and work in the EU.

He said there were various possible Brexit models, ranging from soft to hard. At the softer end would be a situation similar to that of European Economic Area (EEA) members – for example Norway. EEA members are part of the EU’s single market, but as Sleight pointed out, they are not able to vote on or amend EU laws. He described this model as a light version of Brexit

A slightly harder model would be comparable to EFTA (European Free Trade Association) members, for example Switzerland, and Sleight said this was more of a negotiated, rather than off-the-shelf agreement.

Hard Brexit

He said the UK government had positioned immigration control as non-negotiable, and therefore a hard Brexit choice. Meanwhile, market access and financial passporting were crucial to the UK economy – a soft Brexit stance.

“They want to mix and match,” he said, “so there is no off-the-shelf solution.”

He added that there were less than two years to negotiate the divorce.

“It’s not long enough. The EU has less to lose than the UK, but it does have something to lose.”

He questioned whether an interim deal could be achieved, and whether there was a will on either side.

Looking at the impact so far, he pointed out that around 70% of construction equipment sold in the UK was imported. The Pound Sterling is down between 6 and 15% against currencies of countries which export equipment to the UK, while other impacts for customers will include diesel and parts prices, etc. He said that further falls in the Pound would increase inflation.

“Increases will be passed on to customers sooner or later,” he said.

For UK equipment manufacturing, future tariffs would be a barrier to exports to the EU.

“Sales tariffs could be a reality in two years,” said Sleight. “The flight of manufacturing could be a real possibility. International manufacturers have the global footprint to relocate.”

Malcolm Kent, senior technical consultant at the CEA, was asked if he could see any benefits for the UK to Brexit, but he said he would “struggle to come up with one”. He said that trading with countries outside the EU could not be seen as an “”opportunity””, as most companies were already doing that.

Practical solutions

Risks, practical solutions and opportunities were looked at by Paul Verrips, director for Nordic and EU affairs at international trade consultancy Customs Direct.

He said that a final agreement was not likely to be concluded before the UK left the EU, so a transitional agreement might be required. However, he added that it would be potentially difficult to come to such an agreement when the direction was not clear.

He said options included 0% tariffs, temporary EFTA membership – which he said was a possibility, even though it had never been done before – and sector specific solutions.

Verrips said that the transitional timeframe, when positioned against the wider Brexit timing, presented an incredibly complex and uncertain negotiating platform.

He said that while tariffs were a key issue, there were other barriers to be faced. “It could be standards, or jobs, or environmental,” he said.

“The UK has to understand that it will be outside the Single Market and Customs Union.”

He said there was much to do and so little time. The potential for a well-thought out strategy faced considerable threat, and perhaps the risk of unintended consequences.

“Given that we are driving into the unknown with a significant risk of a crash, it could be a good idea to ensure that the seatbelts and airbags are installed, and function properly. This can and should be done ASAP.”

Legal implications

The legal implications of Brexit for companies operating in construction were examined by Virginie Colaiuta, partner at law firm Brown Rudnick, who said that, in principle, infrastructure and the construction industry performed best in a stable political and economic environment.

She said Brexit could have some short- and long-term impacts on the UK infrastructure sector, but that the specific consequences were not all predictable.

“Any detail depends on the results of the negotiations,” she said.

On 2 October, 2016, the Prime Minister announced plans to introduce a Great Repeal Bill which will repeal the binding effect of the European Communities Act 1972 and transpose all the European Union laws into the domestic legal system.

Colaiuta said this change would take effect on the day the UK officially left the EU. In the short term, she said, the changes in the existing legal system might be minimal. After that, the UK government would be able to amend or repeal any European regulation.

“This might be good – or not,” she said. “The problem is we don’t know.”

EU procurement regulations, she said, have mostly been enacted and embedded within UK legislation. Since the UK was very influential in originally drafting the existing EU rules, she felt it would be difficult to justify making changes.

“The level of sophistication may not be desirable post-Brexit,” she said. “To modify the regulations would be complex and time consuming, and not to the best advantage of the UK.

“”It would affect the UK in Europe, and European companies in the UK.”

With changes in law possible after the UK’s exit, Colaiuta said it might be better to choose European laws.

“If you choose one country in Europe, it will give stability,” she said, adding that this was especially true if the choice concerned the law of a European country which was already an export destination.

Among other changes, she suggested that industrial health and safety would probably be affected, but not immediately, as well as environmental regulations.

Future uncertain

Colin Timms, another senior consultant at Off-Highway Research, was the final speaker, and he admitted that the future was uncertain.

“There are opportunities,” he said, “so let’s be positive.”

He cited US President Donald Trump’s promise to provide $1 trillion for infrastructure.

“This could be good for everyone,” said Timms. “It will be US first, but they can’t supply everything.

“Brexit will be difficult, but there are other markets, and we must look to the rest of the world.”

Away from the CEA conference, there has been plenty of other speculation about the Brexit situation, with most, like London-based corporate finance house Nash & Co, admitting, “The long-term effects of the Brexit vote are still hard to predict, as the negotiations between the EU and the UK have just begun and the outcome is fundamentally uncertain.”

It released a Brexit Update last September, and in a further update this month it reported that the Construction Purchasing Managers’ Index (PMI) in the UK had remained steadily above 50 since September, 2016, following a brief spell below 50 between June and August, 2016.

It said the outlook was generally positive, with construction output forecast by the Construction Products Association (CPA) in April, 2017, set to rise by 1.3% in 2017, 1.2% in 2018 and 2.3% in 2019.

At the CPA, economics director Noble Francis said, “Construction output has been sustained post-referendum, primarily due to projects signed up to before June 2016. Activity is expected to remain strong in the first half of this year in all the key construction sectors – private housing, commercial, industrial and infrastructure.

“Looking further forward, a fall in contract awards during the second half of last year is likely to impact greatest where Brexit uncertainty affects sectors requiring high investment up front for a long-term rate of return, such as commercial offices and industrial factories.”

Falls forecast

However, despite this upward revision from the CPA’s October forecasts, Nash & Co said that underlying the figures were stark differences between significant rises in infrastructure and housebuilding, while falls were forecast in commercial office and industrial construction.

It said that, overall, the construction sector continued to be resilient. Key reasons for this were said to be continued government support for housing – for example, the Help to Buy scheme; and the fact that house prices were still rising. It said that consumer confidence driven by such key factors as high employment, good mortgage availability and low interest rates was helping, and that the strong long-term outlook was being driven by structural requirements to invest in infrastructure and housing.

Nash & Co found that the industry had identified challenges such as imported inflation thanks to the currency devaluation and the potential impact on consumer confidence; and uncertainty in commercial construction, particularly in London where residential construction is also subject to downward pressures in terms of pricing, reservations and secondary transactions.

As a result, companies have responded by focusing efforts on increased efficiency, and adjusting supply chains, replacing overseas suppliers for local ones where possible. They have been passing on cost inflation to customers, which it said had so far proved a successful strategy for some.

At the Royal Institution of Chartered Surveyors (RICS), head of UK policy Jeremy Blackburn said, “It is everyone’s responsibility to make Brexit work.

“Britain must retain its front line position on the international stage. Delivering the airport hubs, high-speed rail networks and energy systems needed to make our cities and industrial hubs global competitors will be critical to our future success.”

He added, “However, it is unrealistic to expect government to deliver a successful Brexit without the full – if sometimes constructive – support of industry.”