Will China build tomorrow’s Britain?
Deeply fragmented, plagued by low profit margins and facing a rapidly shrinking workforce, the UK construction sector faces an ominous future.
Demand for its services is rising, and if the top 20 contractors do not consolidate and become the top five, for instance, much bigger and better-capitalised firms from outside, particularly from China, seem certain to sweep in and do the job for them.
The stark premise is this: rich, developed countries can lose the ability to build for themselves.
For evidence, look at Israel. Faced with manpower shortages and a lack of basic capacity, its government last year asked five big Chinese construction companies, and one Portuguese one, to come and build homes. Each would be allowed to bring up to 1,000 of its own workers, and each would have to show it had started building at least 250,000 square metres of new housing by the fourth year.
Israel may be the start of a trend which the UK seems set to follow.
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Its construction sector is under pressure from all sides. Experienced workers, managers and professionals are ageing en masse and are not being replaced. This profound manpower depletion could be exacerbated by Brexit. The sector’s capacity is hobbled by chronic structural vulnerabilities: it is fragmented and reluctant to embrace innovation; it is prone to waste and error; and it scrapes along with tiny, or vanishing, profit margins.
Seemingly unable to rouse itself, the sector is heading for the rapids of sharply increased demand, in housing and in the government’s bulging infrastructure pipeline, which includes very big items like new nuclear power stations and the high-speed rail network, HS2.
Put together, it equates to a vice that is tightening inexorably, and something will have to give. The national crisis now unfolding over residential tower-block fire safety only adds to the feeling of sectoral unsustainability.
This time we mean it
The language used in recent years to describe the gathering skills shortage in the UK has tended toward the dramatic. “Skills time bomb”, said the Construction Industry Training Board (CITB) in 2013. “Severe and immediate shortages”, warned KPMG and the London Chamber of Commerce and Industry in 2014. “Perfect storm”, said Zurich, the insurance company, in 2015. As 2016 drew to a close Mark Farmer, author of the latest of many reviews on the industry, reached for the starkest injunction yet – “Modernise or die”.
The language may have de-sensitised the industry. If true, this is unfortunate because the numbers are indeed alarming. Put simply, the UK construction industry is losing workers faster than it is recruiting new ones.
The most widely cited set of “smoking statistics” comes from a 2011 census which found that 30% of the total construction workforce (totalling about 2.1 million) were over the age of 50. The youngest of these are now 56. This cohort of up to 700,000 will be packing their things and heading for the exit before the decade is out.
Close on their heels will be an even bigger group, the 38% (around 800,000) who were between the ages of 39 and 45 in 2011 (now aged 45 to 51). It means the hall is emptying quickly, and the rate at which it is emptying will speed up, and stay sped up.
Meanwhile, young people are not racing in to fill the hall behind them. According to the CITB, in 2015 the number of first-year trainees among all construction occupations stood at just 14,900. That number is the latest point on a steep and relentless decline from 2005, when the number exceeded 45,000. (See Figure below) Farmer has warned, “we could see a 20-25% decline in the available labour force within a decade”.
Numbers of first-year trainees 1990-2015 for all occupations in Great Britain (CITB)
This demographic trend is occurring at a time when demand for construction workers and professionals is set to rise. One driving factor is housing. Like in Israel, supply in the UK has failed to match demand for decades.
Newly awakened to the issue, government is exerting pressure, and home construction is on the rise. In England, official figures show that 170,690 homes were added to the national stock in 2014-15, a 25% increase on the previous year. The rise continued last year, with 189,650 net additional dwellings in 2015-16, up 11% on the year before.
Infrastructure is another driver of demand. In 2015 the government released its National Infrastructure Pipeline, a schedule of projects together worth £411 billion (in 2013-14 money) in sectors including energy, transport, waste, flood defence, and communications. Included were megaprojects such as HS2, Hinkley Point C nuclear power station, the Thames Tideway Tunnel (known colloquially as the “super sewer”).
The government said delivering these would require an extra 100,000 workers, who would need to be recruited and trained by 2020.
The skills challenge did not stop there, however. In the government’s analysis, because of the changing “skills blend” needed to deliver the plans, around 250,000 of the existing workforce would need to be retrained over the next decade, in addition to the extra 100,000 workers. In December 2016 the government added 20 more projects to the pipeline which, along with other inclusions, pushed its combined value to more than £500bn.
So at a time when the UK construction workforce needs to be expanding and “up-skilling”, it is shrinking. And after the Brexit vote on June 23, 2016, there is widespread concern is that the workforce will shrink even more.
The Brexit effect: Time to panic?
The National Institute of Economic and Social Research (NIESR) assessed the size of the migrant construction workforce in 2016 and came up with a figure of approximately 126,000 EU workers. Viewed against the industry’s underlying skills problem, with an exodus of 700,000 looming in the next decade, to be followed by 800,000 more, this might be classed as “a headache we could do without” rather than a catastrophe.
But companies operating in London will be hit hardest, because the data suggest that EU workers are concentrated heavily in the capital.
In the days before the referendum architect Rogers Stirk Harbour + Partners said Brexit would be a “catastrophic error of judgement” and that more than 40% of its staff were non-British EU citizens.
Britain’s biggest contractor, Balfour Beatty, worries that it may no longer be able to handpick highly skilled engineers from EU countries.
Even if the industry retained access to a plentiful and versatile source of labour and skills from Europe, it would still be in trouble.
“It doesn’t really matter about the exact scale of the problem. We know it’s big,” James Bryce, director of strategic workforce planning at Arcadis, told us. “The question is whether it’s big, very big, or enormous, and what are we going to do about it?”
The reasons for the skills crisis and for UK construction’s chronically poor productivity go back decades.
There is the deep fragmentation of the industry into long subcontracting chains in which main contractors win the work, then pass the cost of training down the line to the companies who can least afford to bear it. If you were to depict the shape of the industry according to company size, it would be like a very young tadpole, with contractors whose name you might recognise clustered in the plump little head, and everyone else stretched out along an absurdly long tail.
The latest survey by the CITB shows that 86% of firms employ fewer than 10 staff whereas only 1% employ 100 or more.
You do not have to travel far along the tadpole’s attenuated tail before its thickness reduces to the width of a single cell, because around 40% of the overall labour force is thought to be self-employed.
Powerful incentives drove this mass casualisation. Often abetted by payroll companies, contractors effected the wholesale transformations of permanent staff into freelancers, allowing the companies both to protect themselves against economic downturns and to slough off the costly burden of holiday entitlements, sick pay, employer’s National Insurance contributions and company pensions – not to mention the responsibility to train.
As a result, the NIESR says roughly a third of British construction workers are not qualified even to NVQ level 2, and fewer than half have completed an apprenticeship. “The figures for trainees and apprentices are a disaster,” says Linda Clarke, professor of European industrial relations at Westminster University. “There’s a lot of low-level training, but it’s NVQ2 if you’re lucky.” She adds that only 16% of all construction trainees are pursuing an NVQ level 3, which is the standard level in much of mainland Europe.
Just about managing
UK construction is less an “industry” than a vast expanse of territory comprising hundreds of thousands of companies (234,000 of them classed as contractors), finely minced in terms of function and geography, all chasing work, on price, from an equally vast and variegated universe of clients.
Analysis carried out for the Department for Business, Innovation and Skills in 2013 showed that for a “typical” large building project, that is, in the £20-£25 million range, the main contractor may be directly managing around 70 subcontracts of which a large proportion are £50,000 or less.
Driving innovation into this territory is difficult.
Meanwhile, up in tadpole’s head, the UK’s biggest contractors are hurting.
These are the ones who should be in a position to respond to the gathering demand for large programmes of infrastructure and residential building. But among the top 20, five made a loss in 2014-15. Loss-makers include the UK’s biggest contractor, Balfour Beatty, whose turnover of £8.4 billion is around double that of its nearest rival.
Read the rest of the article at GCR