Report for the Council of Regional Economic Advisers

Construction Slowdown

February 2009

This paper considers the serious construction slowdown that has occurred in the West Midlands region as a consequence of the recession and the credit crunch. The second half of the paper considers the actions that can be taken at a regional and national level to mitigate the impact of the economic downturn upon the construction sector.

Current Impact of the Economic Downturn on the Construction Sector

The strategic nature of the industry means that it is key to holding together the regional economy. Infrastructure and housing – two key pillars of the regional economy – are suffering in this downturn and, as a consequence, that has an impact on the entire regional economy.

Civil Engineering and the construction sector will benefit from some recent investment decisions. For instance:

• Announced in December that construction work will begin in the summer on the A46 between Newark and Widmerpool that should help with civil engineering jobs from the West Midlands region;
• Announced in December that the latest phase in the construction of the International Pier Project at Birmingham International Airport had been completed;
• Announced in January, a new scheme to help with bus lanes and bus shelters so there are better transport links between Solihull, Birmingham International Airport and the National Exhibition Centre;
• Announced in February, that a new Tesco store will be built in Wolverhampton city centre;
• Government funding for the re-development of Birmingham New Street Station.

But despite these positive developments, there have been a serious of setbacks in the construction sector across the West Midlands region which has led to serious job losses.

Examples include Chase Midland developers who no longer operate.. Other examples include Castlemore Securities going into administration while smaller developers like Pettifor have also stopped operating.

The construction sector suffered serious set-backs - before manufacturing and other sectors entered recession - from early 2008. This is due to the combination of a fall in the housing market combined with a squeeze in credit markets followed by a general recession which has made the construction sector the first major sector to suffer for a long period of time.

Regional statistics have been gathered to demonstrate the extent of the problems.

According to the Department for Communities and Local Government's Housing Statistical Bulletin – December Quarter, 2008 – England, all regions experienced a decrease in starts between calendar year 2007 and calendar year 2008.

Between the December quarter 2007 and December quarter 2008, eight regions, which included the West Midlands, experienced a fall in completions, contributing to the 26 per cent fall in national completions between these two quarters. Only one region, London, saw an increase in completions in the December quarter 2008 compared with the same period in the previous year. All regions experienced a decrease in completions between calendar year 2007 and calendar year 2008.

In February 2009, the Royal Institution of Chartered Surveyors (RICS) produced their own survey data that showed that the decline in construction in the West Midlands region reflected the national decline. They found that total workloads have slipped to a new low driven principally by weakness in the private sector. New enquiries about starting projects are also continuing to slide particularly in the housing, commercial and industrial sectors. Ominously, there has also been some deterioration in the response from RICS members regarding new enquiries in the infrastructure sector. Significantly, expectations on future workloads and profits margins are now under heavy pressure. In the last downturn in the early 1990s, construction output fell, peak to trough, by roughly 15%. Given the current macro backdrop and the increasing problems surrounding the PFI programme, it would not be unreasonable to expect a broadly similar decline this time around.

The RICS also found that private housing workloads remained the weakest category with 65 percent more West Midlands surveyors reporting a fall than a rise over the last twelve months. Private industrial saw the sharpest decline in the Midlands and Wales whilst infrastructure remained a little more resilient. However, workloads in this area still declined at the fastest pace in the survey's history and in the West Midlands this was the case with 77 percent more chartered surveyors reporting a fall than a rise. The RICS also reported that confidence in prospects for the next twelve months is also at its gloomiest with a record 46 percent chartered surveyors in the West Midlands expecting workloads to fall rather than rise. Meanwhile, a net balance of 73 percent expect a further erosion in profit margins and a net balance of 62 percent anticipate being forced to make job cuts over the period. As recently as the first quarter of last year, chartered surveyors in the construction industry were still looking to add to, rather than lower, the headcount.

In addition the Chartered Institute of Building (CIOB) assessed in January that the downturn in the construction sector could lead to a serious loss of skilled people across the country:

The loss of technical resource and therefore expertise has been considerable and there are already signs that an upturn in the fortunes of the UK economy will not see these people return

CIOB also estimate that the sector will suffer more from crime:

An unexpected knock on effect of the credit crunch has been a dramatic rise in worldwide construction fraud

(The Impact of the global financial crisis on the construction industry – CIOB, January 2009)

Construction professionals are top of the list of workers joining the dole queue, according to the latest national figures from the Office of National Statistics.

Quantity surveyors showed the biggest increase with almost 600 signed on in December 2008, compared to just 100 the previous year.

And 4,010 construction managers were claiming dole payments in December, compared to 785 in the same month last year.

Also on the list are:

PROFESSION	Dec 07	Dec 08	% change
Quantity Surveyors	100	590	490.0
Architects	150	810	440.0
Architectural technologists and town planning technicians	130	680	423.1
Managers in construction	785	4,010	410.8
Chartered Surveyors	230	850	269.6
Heavy goods vehicle drivers	2,645	8,880	235.7
Civil Engineers	390	1,205	209.0
Mobile machine drivers and operatives	1,015	3,110	206.4
Bricklayers, masons	4,325	12,600	191.3
Crane Drivers	215	595	176.7
Town Planners	55	150	172.7
Building and civil engineering technicians	195	525	169.2
Carpenters and joiners	6,685	17,625	163.6
Scaffolders, stagers, riggers	1,420	3,715	161.6
Estimators, valuers, assesors	215	520	141.9
Property, housing and land managers	430	1,010	134.9
Steel Erectors	450	1,050	133.3
Plasterers	3,425	7,780	127.2

Regional Actions to Address this Downturn

Advantage West Midlands has made some important steps to help the industry such as:

• £48 million worth of gap funding so that key projects continue;
• Flexibilities in rules governing funding from the West Midlands Housing Corporation;
• Continued investment in key sites, such as Longbridge in Birmingham;

In addition, business is aware that Advantage West Midlands commissioned GVA Grimley to advise on projects and areas whose assistance would help the sector and, therefore, the regional economy.

However, despite this good work, we would encourage the Regional Funding Allocations (RFAs) process to recognise the need for social and affordable housing is greater than ever with the number of repossessions across the region increasing. At a time when Registered Social Landlords (RSLs) are reducing, in the main, expenditure on new build due to macro economic pressures, RFAs are critical to maintaining some form of affordable housing supply.

Advantage West Midlands has led on developing public – private partnerships in north Staffordshire but we suggest key infrastructure projects in this major conurbation would benefit the area, the sector and the wider regional economy. Projects can include:

• Social and affordable housing in North Staffordshire
• School rebuilding – Government funding must deliver the required outputs. Speed up the procurement process for the public sector (eg Building Schools for the Future programme) retaining competition between suppliers;
• Stoke on Trent bus station;
• Initiate more work to improve the existing housing stock quickly, delivering environmental benefits and helping small businesses;

The ceramics sector (bricks, clay drains, roof tiles, sanitary ware, table and giftware, refractories, tiles for walls and floors, industrial ceramics) is being particularly hit because of the downturn in the economy and the housing market. Therefore active promotion and recognition of North Staffordshire as the Ceramics Centre of Excellence is proposed with a corresponding focus on design, R&D and specific funding to help sustain the supply chain network, acknowledging the inter dependence of small and large major manufacturers and their suppliers.

Business is aware that a list of strategic projects is being developed by the Shadow Joint Strategy and Investment Board for funding. We would recommend that social and affordable housing is included here as a major objective because of the following factors:

• Repossessions have gone up so greater need for social housing;
• New homes will generate a boost to the wider economy within a short space of time (< 2 years) and create further consumer spending on home contents;
• Development of social housing will help the construction sector and the underlying housing market – thereby helping the wider economy as well;
• Keep skilled people in work for preparation of the upturn when these skilled people will be sorely needed to ensure sustainable recovery from this recession.

We also propose that framework agreements, that were developed to decide on the selection of suppliers in the procurement process, should be opened up. This process was in operation at a time when the boom in the economy meant there were so many suppliers that procedures had to be put in place to ensure an efficient procurement process could take place.

With the collapse of a number of development firms in recent times, this dilemma no longer exists and regional and local procurers are more likely to gain value for money and quality tenders if they open the procurement process and move away from framework agreements.

National Actions

We have consistently proposed wage subsidies or short time working assistance to help people stay in work. We attach an annex to this paper that goes into further detail as to why wage subsidies are critical to keeping people in work and maintaining a diverse business base for the sake of the wider economy.

Other measures we propose include:

• Changing void business rates. Void business rates have caused harm as a direct consequence of the recession. While we acknowledge there would have been business concerns come what may with void business rates, this tax has exacerbated problems in the region;
• Retaining industrial building allowances for investments prior to 31 December 2007 would be welcome – withdrawal has invalidated long term investment decisions and dramatically reduced assumed cash flows at a critical time;
• Initiate more work to improve the existing housing stock quickly, delivering environmental benefits and helping small businesses.

The West Midlands Developers Alliance has stated that when, in a downturn, some developers would consider speculative developments in preparation for the upturn, this has ceased so that developers do not have to pay void business rates.

We consistently receive anecdotal reports of some commercial buildings being demolished to avoid paying the tax. This is damaging as the reduction in commercial properties means it will take far longer for jobs to be created when economic conditions improve because commercial property has been reduced in numbers.

We appreciate this was never the intention of the Government and in fact the tax was aimed to address concerns with large financial shareholdings not paying their due tax. But it has had a deleterious impact in the West Midlands region at the worst time for our regional economy.

While we welcome the change in the tax threshold as announced in the Pre Budget Report we would suggest, because of the damage caused by the tax in a recession, that the Secretary of State uses the powers at hand and reduces the void business rates by 50%. We appreciate legislation is needed to remove void business rates but at least a 50% reduction would go a long way to reducing the damaging impact of void business rates. We also support the stance of the National Housing Federation who have argued that a fiscal stimulus in housing would be good news for the wider UK economy. In February 2009, they stated that investing in housing across the country would

• Support jobs: building 100,000 social rented homes over the next two years would save 30,000 jobs in the industry, as well as thousands who support the industry, including building materials, furniture and white goods
• Retain skills and drive innovation: Preserving construction jobs and apprenticeships will help prevent a loss of key skills that could take years to replace
• Promote long-term macroeconomic stability: Supporting the industry will enable house builders to continue to invest in housing supply and reducing the risk of a housing supply shortage once the upturn comes
• Sustain business activity: The proposed programme would improve cash flow and reduce risk for developers and suppliers currently experiencing severe financial pressure, and
• Increase labour market mobility: Worsening affordability and lack of affordable and social housing make it more difficult for households to move to take up new jobs and contribute to recruitment and retention difficulties, especially in the public sector.

The additional economic activity generated by the programme would also lead to higher taxation revenues for the Exchequer, including income tax, national insurance, VAT and corporation tax. Such a stimulus in terms of infrastructure would also have a similar effect.

In addition, the new Homes and Communities Agency (HCA) can also adopt procedures that would make it easier for housing associations to initiate new build projects. For instance, when grants are being made to housing associations, more can be paid up front therefore enabling the more extensive use of funding facilities that housing associations already have in place.

In addition, the HCA can itself invest in projects by meeting land and infrastructure costs. Finally, the HCA needs to recognise that with the stalling of the housing market, the days when cross subsidy of developments by housing associations selling housing to subsidise rented housing is over for the time being. This needs to be recognised, therefore, in the grant levels awarded to housing associations.

We have also proposed a number of funding mechanisms to help pay for housing and infrastructure developments. These include:

• Accelerated Development Zones – Developed via the Core Cities work by PriceWaterhouseCoopers, this enables local authorities to borrow against land values that would be developed due to regeneration work and would then lead to new business rates as a consequence;
• Bond Financing – Local authorities in Europe, Japan and North America can issue bonds, under central Government supervision, to ensure much needed local infrastructure developments take place;
• Prudential Borrowing – Allowing Regional Development Agencies and other public regeneration bodies to use prudential borrowing for capital projects. At the moment only councils can use this facility;
• Ending the Capital – Revenue Split – Regional Development Agencies need all the flexibility they can get to respond to the recession in their regions. However, the capital – revenue split in RDA budgets prevent this flexibility at a time of the greatest crisis in the regional economy. We propose this split should end, at least for the life of this immediate crisis.

Conclusion

Construction is the bedrock of the economy. Once this is damaged then sectors from manufacturing to professional services are damaged as well. Therefore help for the sector is in the best interests of the national economy and it is for this reason that the Business Voice WM – representing all business sectors via its different business representative organisations – is specifically proposing a focus to help the construction sector.

Annex A

Wage Subsidies and the Credit Crunch

Why is business calling for wage subsidies?

The business community do not want to see redundancies. Not only do redundancies harm families and the local economy – it also puts back the day when businesses can recover from the economic downturn when the upturn comes.

Businesses need to keep their skilled people in work so that they can forward plan for their business and be in a good competitive position for when the upturn arrives. Good businesses rely on a skilled workforce being in place. The loss of skills – caused by redundancies – puts back the recovery time for a business to weather the recession.

But short term economic pressures in this recession means that businesses – large and small – are under significant influence to consider redundancies.

Avoiding redundancies is an objective that business, the Government and the unions all share. But business and the unions agree that wage subsidies can work to prevent redundancies – and help the wider economy.

How would wage subsidies work?

Wage subsidies - or short time working assistance – have been introduced in the UK during previous recessions.

It worked in a similar way that Statutory Sick Pay (SSP) works now. With SSP an employer gains compensation from the State when an employee temporarily leaves their job because of illness. This helps the business maintain its cashflow while ensuring the employee can recover fully from their illness.

Short time working assistance, when it was in place in the recessions of the 1970s and the 1980s, is similar in practice to SSP. When businesses under recessionary pressures are forced to reduce working hours then a time comes when that business has to consider whether redundancy or short time working is the most cost effective way forward to ensure the survival of the business.

However, short time working assistance pays a proportion of the wage to the employer so that the employees can stay in work – so preventing large scale redundancies in a recession.

How can the Government - paying out public money - help the economy recover?

The vast majority of businesses who have been hit by the double whammy of the credit crunch and the recession are suffering through no fault of their own. Their businesses are solvent - offering good products and services and their existence means the UK economy has a wide business base and not narrowed down to a few business sectors – so helping to create a balanced economy.

With the current economic situation businesses are going through – with demand and credit being squeezed at the same time – this is a unique set of circumstances for businesses to weather.

If redundancies and business failures were allowed to happen on a large scale then, by the time the economic upturn comes, the business base of the country and the Midlands would be severely reduced – making regeneration objectives from the public sector harder to achieve.

In addition short time working assistance helps the economy in three ways.

• It helps the Government as money paid out in short time working assistance to keep people in jobs is cheaper than paying benefits to unemployed people and their families;
• By keeping people in work, consumer spending can be kept to a level which will help drive the economy out of the recession;
• It helps the business by keeping the skilled workforce in place – in preparation for the upturn.

Where else has short time working assistance been implemented?

A form of short time working assistance is happening now in the UK – but only in Wales. Businesses in England cannot be part of the scheme as it is administered by the Welsh Assembly Government. In Wales, the ReAct programme subsidises the wages for one year for an unemployed person that a firm could decide to employ.

In Germany, short time working assistance has now been introduced for the automotive sector – reducing the fear of redundancy and the negative impact this has on consumer spending.

In the Netherlands, it was announced in November that short time working assistance would be extended from helping unemployed people back into work to helping ensure people stay in work.

And in Japan, Mitsubishi Motors and Mazda have asked their Government in January for short time working assistance to avoid mass redundancies at their plants.

Conclusion – Short Time Working Assistance and the Credit Crunch

Business is not claiming short time working assistance is the sole answer to addressing the economic downturn. Clearly the combination of the decline in customer demand and the simultaneous decline in credit will take some time to resolve.

But short time working assistance can help the economy weather the storm and help the UK come out the other side of this recession - with key strategic businesses and sectors in tact – who can then lead with the country's economic recovery.

Annex B

Business Voice WM

The Business Voice WM (BVWM) is a UK First – the first time independent business representative organisations have chosen to come together to speak with one voice on the key regional business issues. No other region of the UK has such an organisation;

BVWM is an umbrella organisation for the whole West Midlands region – covering Herefordshire, Shropshire, Staffordshire, Warwickshire, & Worcestershire together with Birmingham/Coventry/Wolverhampton and the West Midlands conurbation.

The member organisations of BVWM are:

• Asian Business Forum
• Association of Colleges
• British Ceramic Confederation
• Business in the Community
• Chartered Institute of Building
• Civil Engineering Contractors Association
• Co-operatives West Midlands
• Country Land and Business Association
• Engineering Employers' Federation
• Federation of Small Businesses
• Institute of Chartered Accountants in England and Wales
• Institute of Chartered Secretaries and Administrators
• Institute of Directors
• Institution of Civil Engineers
• Midland Association of Restaurants, Caterers and Entertainment
• National Farmers' Union
• National Federation of Retail Newsagents
• National Housing Federation
• Royal Institution of Chartered Surveyors
• Stratford upon Avon Town Management Partnership
• UK IT Association
• West Midlands Chambers of Commerce
• West Midlands Developers Alliance
• West Midlands Higher Education Association
• West Midlands Minority Ethnic Business Forum

For further information, please contact:

Business Voice WM
Albert House
Quay Place
92/93 Edward Street
Birmingham
B1 2RA

T: 0121 245 0140
F: 0121 245 0141
E: info@businessvoicewm.org.uk
W: www.wmbusinesscouncil.org.uk