The forthcoming EU referendum will be one of the most significant decisions the UK public will make in a generation. As has been well publicised in the media, regardless of your political affiliation, it is widely recognised that the outcome of a UK withdrawal from the European Union (“EU”) would have significant implications for the UK, with reverberations likely felt across Europe and potentially further afield.
In this article we briefly examine how a withdrawal from the EU may impact the UK construction sector. We will highlight some of the important considerations that businesses should be considering in the event of a “Brexit”.
Eversheds has clients with many different opinions and, therefore, is neutral as to the outcome of a Brexit vote. This article is no more than an attempt to identify some of the issues that businesses operating in the construction sector should be considering and the contingency plans they should be making.
The mechanics of a Brexit
On 23 June the UK public will cast their votes to a simple yet history defining question: “Should the United Kingdom remain a member of the European Union or leave the European Union?”, responding either “Remain a member of the European Union” or “Leave the European Union”.
A “Leave” vote would immediately trigger a series of events for which there is no precedent and an almost certain period of political and economic uncertainty. Article 50 of the Treaty on European Union provides a somewhat vague roadmap as to how the UK’s withdrawal from the EU would proceed. It provides for:-
- a member state to notify the EU of its withdrawal; and
- for the EU to negotiate a “withdrawal agreement” with that member state, which would include a framework for that member state’s future relationship with the EU, within two years. This two year period could be extended with the unanimous consent of the European Council (the Heads of State of the EU member states), in agreement with the member state in question.
During the two year negotiation period, the UK would continue to be a full member of the EU and would continue to be required to abide by EU treaties and laws. Furthermore, it would continue to take part in all EU decision-making except in relation to the withdrawal agreement.
The Prime Minister has said that in the event of a majority vote in favour of leaving the EU, an Article 50 Notice would be served on the European Council straight away. However, other approaches to the mechanics of an exit have also been debated:
- waiting for the EU to approach the UK about negotiating a withdrawal agreement. This tactic would buy the UK some time to prepare for the withdrawal negotiations before the two year clock starts to run. Many commentators are of the view that two years is a very short time to negotiate a withdrawal agreement (which is, in effect, a trade agreement). Indeed, it took the EU seven years to negotiate a trade agreement with Canada;
- repealing the European Communities Act 1972 – this would, however, put the UK in breach of international law and cause even greater uncertainty for businesses.
The UK’s options post-Brexit
The terms upon which the UK would exit the EU would depend upon the outcome of the withdrawal negotiations and subsequent withdrawal agreement. Only then can the true impact of the UK’s exit be accurately defined.
It is generally agreed that there are five possible post-Brexit models. These have been summarised in Table 1 appended to this article. The three most likely models are:-
- the Norway model;
- the free trade agreement model; and
- the World Trade Organisation (“WTO”) model,
which are each discussed in more detail below.
The Norway model
This would involve the UK agreeing a free trade agreement with the EU that is based on a model currently adopted by Norway (as well as Iceland and Liechtenstein). Through membership of the European Economic Area (“EEA”), the UK would maintain access to the EU Single Market which would then allow the continued free movement of goods, services, capital and people between the UK and EU member states in most sectors. In return, the UK would be required to contribute to the EU budget and to implement EU legislation on which it would have no entitlement to vote. This model has been described by some commentators as “the pay, but have no say” option.
The free trade agreement model
This would involve the UK and the EU entering into a comprehensive free trade agreement with the aim of eliminating or, failing that, reducing trade barriers between them in respect of the goods specified in the agreement. Such an agreement could also cover services. The UK would not be required to contribute to the EU budget and would have no entitlement to vote on EU legislation.
The WTO model
The WTO model would represent the “cleanest” break with the EU and is the default position if the UK and the EU fail to reach a trade agreement. The UK would rely on its membership of the WTO as a basis for trade with the EU, but the UK would not be part of the EU Single Market. UK exports to the EU would, therefore, be subject to the EU's Common Tariffs. However, the UK would not be required to contribute to the EU budget and would have no entitlement to vote on EU legislation.
Possible implications of a Brexit
Depending on which post-Brexit model the UK and the EU adopt, the UK’s exit from the EU may have a number of significant and far-reaching consequences for the UK construction sector. Predicting all of these consequences now is impossible but we have highlighted some of the more likely scenarios below.
A significant amount of EU legislation is currently embedded in UK law and which affects construction. A Brexit would, therefore, not necessarily result in less regulation. By way of example:
- the Construction Design and Management (“CDM”) Regulations 2015 require the implementation of minimum health and safety requirements. The CDM regulations essentially enacted EU Directive 1992/57/EEC and there is no suggestion that the regulations or health and safety in the construction cycle would be swept away because of a “Leave” vote;
- the Energy Performance of Buildings Directive (2002/91/EC) requires Energy Performance Certificates for all types of properties. The obligations that have been placed on the UK were introduced on a phased basis by the Energy Performance of Buildings (Certificates and Inspections) (England and Wales) Regulations 2007. Should the UK vote to leave the EU, the UK may decide to reduce the scope of these directives or repeal them altogether. However, this would not happen overnight. The directives would, therefore, continue to have to be adhered to in some form or another.
EU procurement rules have mostly been enacted and embedded within UK legislation. They would therefore continue in force until they are repealed or otherwise amended. Procurement rules post-Brexit would remain in some form, however the extent to which they may deviate from the existing EU regime and the extent to which a UK company may be able to participate in tenders for other European countries’ projects would depend on the type of post-Brexit model that the UK adopts.
Access to foreign labour
The UK construction industry is heavily reliant on its ability to access skilled foreign labour from within the EU. This derives primarily from the fact that there are insufficient numbers of new and existing skilled workers entering the sector from the domestic UK market.
The terms of a Brexit may well restrict or otherwise seek to limit the free movement of EU nationals and thus limit the UK’s ability to recruit individuals from the EU. The net effect may exacerbate existing labour issues and may ultimately result in a skills shortage that cannot be plugged by the UK workforce alone. There may be increased demand for skilled workers and thus an increase in wages. In the short to medium term, projects may be delayed and overrun due to the lack of skilled labour on site, with overall project costs potentially rising due to higher labour costs. In the longer term, the viability of undertaking large scale infrastructure projects, may be called into question.
Imports and exports
The supply of goods and services for the construction industry is a key driver of growth in the UK. The UK is at least partially reliant on imports from the EU, most notably from Germany, Italy and Sweden. In 2014, 53% of goods and services were imported from the EU. The extent to which these may be affected would depend upon the post-Brexit model. If the default WTO model is adopted, the UK’s default tariffs would apply on goods imported from the EU to the UK resulting in increased costs.
Exports to the EU are also a key part of the UK economy. In 2014, 45% of the UK’s exports were to the EU. If the WTO model is adopted, the EU's Common Tariffs would apply to exports from the UK to the EU, which are likely to reduce overseas EU demand for UK goods and services.
Businesses in the UK construction sector may still be required to comply with EU law. By way of example, the Construction Products Regulation 2011 governs the marketing of construction products in the EU. A Brexit vote would render these rules no longer applicable to the UK. However, if the UK wanted to continue exporting products to the EU, it would still be required to comply with the relevant EU product regulations over which the UK would have little or no control.
From the moment the EU referendum was announced, exchange rates between the Pound and Euro have been in a volatile state. Recent falls in the value of the Pound have raised valid concerns within the industry. In an industry where margins can be tight, where there is heavy reliance on the import and export of goods and services, currency fluctuations can have a significant fiscal impact. Whereas the inclusion of exchange rate clauses in contracts is always a possibility (allowing for example, a renegotiation on price if an exchange rate fluctuates more than a specific number of percentage points), it does mean businesses may need to affect an additional level of strategizing, particularly in relation to exchange rate fluctuations, prior to planning or otherwise undertaking future construction projects.
Access to finance
The availability of finance is often an important pre-requisite for construction projects. Access to funding can determine whether or not a particular project can proceed from design to construction.
Currently as a member of the EU, UK small and medium sized enterprises (“SME”) have access to special programmes for SME financing. These would no longer be available if the UK left the EU. Furthermore, the UK’s existing membership of the EU has enhanced its creditworthiness. A Brexit may quickly change all that, and mean that the availability of financing is reduced. There may be greater uncertainty surrounding the stability of the financial markets which would likely result in the creation of more restrictive financing conditions for borrowers. The cost for developers of obtaining finance for construction projects may also increase as lenders seek to impose higher interest rates.
The ramifications of a Brexit are complex and wide-ranging and something that the prudent business should be considering and planning for now.
A great deal is still unknown about the effect of a “Leave” vote and a post-Brexit world. What we do know is there would be significant uncertainty for businesses in the months, if not years, following the vote.
How can we help you
If you would like to discuss any of the issues raised in this article or the wider implications that a Brexit vote may have on your business, please do not hesitate to contact either Ros Kellaway, James Shackleton or Leith Al-Ali.
Table 1: Possible Post-Brexit Models
Click here to view table.