Why Not Invest Now in Construction?

Post by Denise Chevin (Research Fellow, the Smith Institute) 

A few days ago administrators arrived at the Hertfordshire-based building company Doyle Group, leaving over 200 people out of a job as it set about winding up the business. It’s a stark reminder, if yet another one were really needed, of the parlous state of the British construction industry. Doyle Group is one of the industry’s biggest names to have hit trouble in recent times, not by size but by profile and reputation. It punched well above its weight cementing a name for quality, training and looking after its people. In short it was one of the good guys. “We’re like part of a big family,” staff would often say. Indeed, there were many instances of two generations of the same family being employed by Doyle.

We don’t yet know the precise details yet of what brought down the 50-year old firm, though bad debts and shrunken workloads played a major hand for sure. Struggling to maintain cash flow is a problem for many construction firms right now.

The latest construction insolvency figures show 911 building firms going out of business in the first quarter of 2012. This takes the total to 12,710 construction companies that have failed in the last three years – equivalent to more than 10 a day. Since 2008 the industry employs over 200,000 fewer people.  National statistics showed an 8.5% drop in construction output in April compared with the same time last year, which means the pain is unlikely to ease yet.  And the impact of spending cuts has still to fully kick in. According to Britain’s top civil servant Sir Jeremy Heywood we’re only 25% of the way toward fiscal adjustment, and could face a decade of cuts.

Construction firms have certainly been braced for spending being axed but what they haven’t been quite prepared for is the delays to spending the cash that’s actually been earmarked for new building. Treasury Minister Chloe Smith might not have been able to answer Jeremy Paxman on Newsnight as to where the government is getting its £500m savings from to pay for the delay to 3p fuel tax rise. But I’m sure many building companies can suggest umpteen budgets where the cash is sitting waiting to be spent. Schools, defence and housing are areas that are waiting to come out of the starting blocks through deliberation and review after review.

Housing has had a double whammy from the recession and the shake up in the planning system which has created uncertainty and confusion and anecdotal evidence suggests that applications are now being turned down.  Latest planning statistics showed a fall in applications in 2011. Then there’s the will it or won’t it work questions over the Green Deal. This is supposedly the Coalition’s flagship green policy which is trumpeted as creating 60,000 jobs as households sign up to ‘green their homes’ on the back of saving on fuel bills. Building firms nevertheless, remain sceptical because of a lack of incentives to get the public to take it up.

The industry is clearly rattling a few cages. Vince Cable convened a housing summit a few days ago to see what can be done to  pick house building up from the floor. But ministers can expect the pressure to keep coming from the builders. During the Olympics the UK Contractors Group, the trade body which counts all the biggest building companies as its members, is expected to plaster giant ads on hoardings on building sites round the capital extolling the importance of the industry – it is 9% of GDP after all – and why we need to get its wheels turning properly again. This week the CBI launched a report calling for the government to bring forward spending in repairs and maintenance at the expense of infrastructure because it is more labour intensive and creates more jobs.  Bridging the gap: backing the construction sector to generate jobs said getting employment levels in construction back up to pre-2008 levels would create an extra 193,200 full-time and 24,300 part-time jobs. Repairs and maintenance projects also tend to be part of long-running contracts and are therefore good for generating apprenticeships. It also confirmed that some funding allocated by housing quango the Homes and Communities Agency to social housing providers had not yet been spent.

Over 500,000 people lost their jobs in construction in the last recession. Employment and training missed a whole generation of people. There’s no magic bullet to the crisis, but as the CBI says, bringing forward spending on repairs and maintenance can happen quickly and create new jobs and get the economy working across the country (and not just the South East). Unlike massive rail projects, or nuclear power, it doesn’t take years to go through planning and design. It’s all a bit late for Doyle Groupm but it might just save other firms. Let’s get on and do it.



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