Five budget policies that will affect the construction industry

The Chancellor’s 2018 budget saw some headline-grabbing commitments to additional health spending and tax cuts, as well as an important debate around whether ‘austerity’ has truly come to an end. But what were the key policy announcements for the construction industry?

1. The end of the Private Finance Initiative (PFI)

The government has decided to abandon PFI and its successor PFI 2 as a way of funding public sector infrastructure projects. According to the National Audit Office, there were 716 PFI projects in operation in defence, education and transport in March 2017, the latest figures available, with a total capital value of almost £60 billion.[1]However the cost to the government in fees for these contracts last year was £10bn, and they will cost the public purse as much as £199bn over the next 30 years.

The government is right to move away from PFI, which clearly does not represent value for money for the taxpayer. With its origins in the 1980s and extensive use in the 1990s and early 2000s, PFI was designed for a different era. I agree that the time is now right to move towards a more efficient and cost effective model of private finance, which maximises long term value for the taxpayer.

The question is, what will replace PFI? The government says it remains committed to public-private partnerships where they deliver value for the public sector and where the private sector takes the risk. The Chancellor also said the public sector will no longer be ‘a push over’ on these deals.

The government will honour existing PFI contracts, but will also ‘establish a centre of excellence to actively manage these contracts in the taxpayers’ interest, starting in the health sector.’[2]This more active management of contracts is important, but the detail of how infrastructure will be financed in future is now unclear. The government must work with the industry and the public sector to create a new model of public-private partnership that delivers the greatest possible value for the public sector.

2. Removal of the Housing Revenue Account cap

The Chancellor confirmed the lifting of the Housing Revenue Account cap, which will allow local authorities to borrow more against their assets to fund the development of homes. I believe this will now lead to a much needed council housebuilding revolution – SCAPE and organisations like the Local Government Association (LGA) have been calling for exactly this for a very long time.

The government expects to provide an extra £4.6bn of funding over the next five and a half years, which will increase the number of houses being delivered by local authorities to 10,000 homes per year.

3. New road investment

The government has unveiled a £28.8bn National Roads Fund, which includes £25.3bn for the Strategic Road Network covering motorways and A-Roads. Local authorities will receive £420m to fix potholes on roads and renew bridges and tunnels, and there will be £150m to improve local traffic hotspots such as roundabouts. According to traffic data firm Inrix, delays currently have an economic cost of £1,168 a year for every motorist, a huge £9bn annual hit to the economy.[3] These investments stand to significantly improve local infrastructure and create work for the local supply chain across the UK.

4. City and Growth Deals

The Chancellor announced another round of city deals, including £150m for a Tay Cities Deal, £120m for a North Wales Growth Deal, £350m for a Belfast City Region Deal and the opening of negotiations on a Derry/Londonderry and Strabane City Region Deal. City Deals have had a significant impact on cities across the UK, improving critical infrastructure that encourages regional economic growth. The projects will not only have knock-on benefits for the construction industry's supply chains, but they will also make these regions attractive places for further private and public sector investment, providing long-term economic benefits. The government also used the Budget to announce its backing for the Cambridge – Milton Keynes – Oxford Arc, which could see the development of an extra 1m homes in the region along with major new infrastructure investments, to capitalise on the area’s science and engineering expertise.

5. Austerity

Although the government has provided a significant boost for housing and infrastructure in this budget, the impact of austerity continues to be felt across the public sector. Central government grants for local authorities have fallen by around 40% since 2010[4], and education funding per pupil has fallen in real terms since 2015[5]. Teachers have criticised the Chancellor’s one off £400m grant in this year’s budget for schools to buy ‘the little extras’ they need, with many suggesting the Chancellor is out of touch with the realities on the ground.[6]

It is in this context that the public sector must deliver services and manage its estates. For the construction industry, this means an ever greater focus on efficiency in the construction and management of public sector buildings. Local authorities in particular have never been more focused on the need to deliver maximum value from their buildings, including social value. The industry must work with them to achieve this and deliver new innovations.

The Chancellor certainly views his ‘budget to end austerity’ as a good deal, but in this era of uncertainty this could be a short lived budget; and potentially another deal that fails to deliver.