Breaking up is hard to do
Scottish independence is a simmering issue in Whitehall and Holyrood, but what does it mean for the construction sector north of the border? Michael Glackin finds out
It’s a curious paradox, but the debate surrounding Scottish independence is largely taking place in England. In fact, the Scottish National Party’s (SNP) election campaign for the Scottish parliament last year, which swept the pro-independence party to power with an unprecedented majority, was notable for rarely mentioning what in Scotland became euphemistically known as the “I word”.
Soon after winning the election, Scotland’s First Minister Alex Salmond announced that a referendum on Scottish independence would take place in 2014, and there the issue has been more or less parked. The SNP wants Scotland to vote on two issues: first, whether they want independence; and second, whether they want to remain in the UK with beefed up powers, including fiscal autonomy.
The UK government insists the referendum should ask the first question only, although in a recent visit to Edinburgh David Cameron unexpectedly offered to give Scots much of what is implicit in the second question without even asking it.
For Scotland’s construction industry the debate hasn’t caught fire yet. In the grip of the worst recession in living memory, Scots contractors are more concerned about where the next contract is coming from than whether it arrives in a tartan envelope or Whitehall manila.
Scottish Building Federation (SBF) chief executive Michael Levack sums it up by saying: “A decision on Scotland’s constitutional future will not be made for another two-and-a-half years at the earliest. In the meantime, we need immediate action to rebuild jobs, skills and capacity in our industry.”
Meanwhile, Homes for Scotland, which represents the country’s private house building industry, said in a statement: “It appears this item [independence] is on the agenda for discussion at our next board meeting in March so I am afraid it is a little early for us to be able to comment on this particular subject.”
Added to that is the fact that Scottish companies, and English-based companies that operate in Scotland, already do business in a place where planning, building regulations, public sector procurement and even the legal system are different to the rest of the UK. Indeed, these differences beg the question of whether Scottish independence, or the halfway house of greater fiscal autonomy — so-called “devo max” — would have any appreciable impact on the industry at all.
“I don’t see either making any change in the way the industry operates,” says David Thomson, managing partner with construction and property consultant Robinson Low Francis, which has offices in Edinburgh and Glasgow, as well as elsewhere in the UK. “Construction is already different here, from planning right through to the way the public sector purse is managed. For example, many public sector contracts here are let through the Hub initiative and the Scottish Futures Trust, both very different procurement methods to those used elsewhere in the UK.”
Even the green debate is different in Scotland. Salmond has set out an ambitious plan to satisfy 100% of Scottish energy needs from alternative sources by 2020, but policies advancing renewables and sustainability in Scotland have been pursued by both pro-union and independence governments. “Irrespective of independence, Scotland sees itself as being the renewables capital of Europe,” says Peter Jenkins, chair of CIOB Scotland.
So far, so different. But the financial implications of independence, or even increased fiscal autonomy, could have ramifications for the construction industry that cannot be ignored.
This sculpture at Gretna Green could mark the border between England and Scotland
Scottish firms have been cut out of contracts on the Forth Road Bridge
The 2014 Commonwealth Games is expected to boost Scotland’s national pride in the referendum year
An independent Scotland would have to take on a pro rata share of UK net public debt — which is currently running at more than £1trillion, or 64% of UK GDP. Treasury forecasts indicate it will peak at 71% of GDP in 2013-14. Consensus estimates, whether based on population or proportion of public sector spending, indicate that Scotland’s share of that debt will be £90bn-£110bn. That’s on a par with Ireland’s debt of €119bn (£99.1bn).
Given that revenue from North Sea oil is in decline, Scotland is likely to begin its newfound independence as a heavily indebted nation. As such it is unlikely to retain the triple-A credit rating it currently enjoys as part of the UK. A report earlier this year by the Financial Times claimed the three leading rating agencies — Standard & Poor’s, Moody’s and Fitch — each failed to back SNP claims that an independent Scotland would retain the gold-standard rating. A downgrade would increase borrowing costs for the Scottish government, and leave it with less cash to funnel into the construction industry.
Of course, an independent Scotland would be free to increase taxes to make up the shortfall. But to do so when there’s a lower rate tax regime a few hours’ drive south could be political and economic suicide — especially as the private sector accounts for almost three quarters of construction’s £11bn turnover in Scotland.
“The line between private and public sector investment is increasingly blurred because of PFI and the fact that a lot of social housing is built by private housebuilders nowadays,” explains James Hastings, head of construction futures at Experian. “Private investment accounts for up to 70% of the market in Scotland, although the government remains the largest single purchaser of construction services.”
With the national picture so uncertain, the construction picture is doubly so.
“I think there are many people here receptive to the concept of the Scottish government having greater or autonomous tax-raising powers,” says Jenkins. “But getting investment now, in the middle of the recession is difficult, and for that reason it is difficult to gauge the shape of future inward investment, even if there were clarity on independence.”
RLF’s Thomson doesn’t believe independence or greater fiscal autonomy would be harmful to inward investment or to pan-UK companies like RLF. “In terms of public sector work the OJEU ensures there are no restrictions, and that obviously allows non-Scottish and non-UK groups to win work,” he says. “But the flip-side is that the SNP campaigns on getting jobs and work for Scottish people and businesses. I suspect they would have to prove that aspect of the independence argument to gain wider public support.”
Arguably the Scottish government is doing just that. The recently announced review of public sector construction procurement is aimed at ensuring smaller companies, which in reality means small Scottish businesses, have access to public sector contracts. The review comes amid concerns that Scottish companies are being cut out of public sector contracts.
A recent report by think tank the Jimmy Reid Foundation found that Scottish contractors were disproportionately under-represented in Scottish public sector contracts. Four “hubs” of local authorities, under the system laid out by the Scottish Futures Trust, have so far selected their private sector partners, but three of the four consortia appointed have no Scottish involvement and don’t use local firms in their supply chain.
Scottish firms missing out
The foundation also found that just three out of 16 contractors appointed by public sector quango Scottish Water as “construction delivery partners” were actually Scottish. Earlier this year it emerged that Scottish firms had seen just £20m of the £1.6bn being spent on the new Forth Road Bridge, while £790m has gone to overseas competitors.
The SFT insists Scottish firms are not losing out, but many contractors disagree. “The experience of a number of our members is that the successful consortia for the SFT hubs do not necessarily use local firms but rather their own tried and tested supply chains,” says Jenkins.
The Scottish government’s review looks set to change this situation, and will again mean UK-wide companies having to tailor their work practices to accommodate Scotland’s way of doing things. But again, this will happen regardless of whether Scotland becomes independent or not.
So will the “I word” make a difference? “I’m not quite sure anyone in the industry really has a view on independence,” says Thomson. “We’re all more focused on getting out of this recession.”
Procurement the Scottish way
The Scottish government is driving ahead with a new form of PFI and its own approach to public sector procurement.
In 2008, it established the Scottish Futures Trust to get better value for the public purse on a £1.4bn construction programme. Scotland is divided into five “hubs” (South East, North, East Central, West and South West) with each territory including local authorities, health boards, police and fire and rescue services. Part of the SFT logic is that these services can often be co-located. Each hub selects a private sector joint venture development partner, appointed on contracts of up to 20 years.
Four hubs have now appointed their consortia, the latest being Morgan Sindall and Apollo Capital projects for the 10-year, £200m Western hub.
Although the SFT highlights “opportunities for local SMEs within the construction industry to become involved in high-quality buildings in their area”, the initiative has been criticised as actually reducing SME access to contracts.
The alternative to PFI is the so-called Non-Profit Distributing (NPD) model, which aims to get taxpayers a better deal by capping the returns consortia can earn on PFI contracts. Contractors invest solely in the debt of a project, don’t put in any equity and don’t receive any returns on their investment.
However, whether investors will be enthusiastic about low-return deals like NPD is unclear.