We are just weeks away from the Government’s Spring Statement, when Philip Hammond will update voters on the state of our economy, with just 12 months to go before we exit the EU. We hope to hear some good news, but it is highly unlikely there will be much progress on tackling Mr Hammond’s big bugbear issue, our flagging productivity.
Most efforts to help our economy grow, from employment policy through to the Government’s industrial strategy, will be hampered severely unless we improve our productivity. It means raising the value of the output people in our workforce produce; a measure that lags consistently behind our competitors like France, Germany and the US.
The reason this is so serious is that productivity affects not only our country’s competitiveness, but also the wages people can earn. With Brexit around the corner and stiff global competition, we need answers to this problem urgently.
This is where the construction sector can offer a solution. Our industry is a massive employer, with over 2.3m workers in the UK, and there is plenty for them to get on with: we have a current infrastructure pipeline worth £600bn. The sector’s output, however, is way too low and if we saw even modest productivity improvements, the economic gains and quality of life improvements could be immense.
The first issue to tackle in achieving this involves labour. The UK has become way too reliant on imported workers to deliver construction projects, particularly in London where over half of the construction workforce comprises overseas labour, mostly from the EU. The sector is already struggling with shortages of labour and Brexit could complicate things further.
The second problem is closely related – the output those workers deliver is too low. Construction has simply not yet taken advantage of the new ways of working and new technologies that have helped transform other sectors. As a result, its productivity has flatlined over the last 25 years, meaning that it has fallen progressively behind other sectors that have been better at moving with the times.
The Government, to be fair, has recognised this problem and a positive recent move was the announcement of a construction “sector deal”. This will include a £170m fund to help bring much-needed innovation and R&D into the sector. This is a great start; however, much more needs to be done to really unlock the huge improvement construction could make to our economy. Our new analysis shows that if construction productivity could be raised towards that of other comparable sectors, the impact would be huge. If it matched manufacturing productivity, for example, £100bn could be added to the UK’s economy each year.
This would give Mr Hammond an additional £40bn a year in tax revenues – enough to eliminate the entire UK budget deficit in one go.
But not only that, the construction sector is key to delivering the infrastructure needed to help our economy thrive outside the EU. Things like better-connecting our major cities to one another and also to growth markets around the world.
The UK ranks only 27th in the world for the quality of its facilities according to the World Economic ForumDecades of infrastructure under investment mean the UK ranks only 27th in the world for the quality of its infrastructure according to the World Economic Forum.
In the North of England, for example, transport links are so bad it is currently quicker to travel the 283 miles from London to Paris by train than it is to travel between Liverpool and Hull.
The good news is that this is completely fixable. Twenty years ago, manufacturing was bottom of the pile in terms of productivity. Today it is producing the same levels of output it did back then, but with 40pc fewer workers.
This massive productivity improvement is a direct result of better use of new technology and new ways of working, and this is the big lesson construction must embrace. This change cannot come about unless we change the relationships between clients and suppliers. In 2017 the average margin for the top ten companies in the construction industry was -0.5pc. This is clearly unsustainable.
Until we create relationships where risks are shared and there’s a universal focus on getting the right outcome we will continue to see cases like Carillion.
With so much construction work being funded by the taxpayer, the Government clearly can lead by example.
We welcome the recent suggestion in the industrial strategy that the Government will be awarding contracts on a range of factors, other than just price. This is completely the right approach, but needs to be more than a box-ticking exercise.
The vast quantities of legislation from the EU around public procurement mean that our civil servants are so focused on compliance that they sometimes lose sight of actually finding the best company to deliver work to. With Brexit we now have the chance to change that.
Recent events have created a perfect storm for change. The question is: will the Government, developers and construction companies have the bravery to do things differently?
Source: The Telegraph