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Brexit and the implications for UK construction

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18-05-2016

Introduction

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:-

  1. a member state to notify the EU of its withdrawal; and
  2. 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:

  1. 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;
  2. 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:-

(i)            the Norway model;

(ii)           the free trade agreement model; and

(iii)          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.  

Regulation

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:

(i)    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;

(ii)   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.

Procurement

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.

Exchange rates

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.


Conclusion

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

 

Norway

Switzerland

Turkey

South Korea

World Trade Organisation

Relationships

-   European Economic Area (“EEA”) – Yes

-   European Free Trade Association (“EFTA”) – Yes

-   EU Customs Union – No

 

-   Bilateral treaties with the EU – Yes

-   EFTA – Yes

-   EEA – No

-   EU Customs Union – No

-   In prolonged accession talks with the EU since 1987

-   Bilateral treaties with the EU – Yes

-   EU Customs Union – Yes

-   EFTA – No

-   EEA – No

 

-   Deep and comprehensive free trade agreement with the EU – Yes

-   EFTA – No

-   EEA – No

-   EU Customs Union – No

-   Free trade agreement with the EU – No

-   EFTA – No

-   EEA – No

-   EU Customs Union – No

Free movement of goods

-   Yes for manufactured goods, as an EEA member

-   As Norway is outside the Common Agricultural Policy (“CAP”) and the Common Fisheries Policy (“CFP”), agricultural and fishery products are subject to the Common Customs Tariff

-   Yes for manufactured goods, under bilateral agreements

-   Yes for processed food (eg yoghurt, chocolate, cheese)

-   As Switzerland is outside the CAP, unprocessed agricultural products are subject to the Common Customs Tariff

-   Yes in theory, but in practice often no:

-  prior approval and licensing required for textiles, chemicals and foodstuffs

-  de facto bans on exports of aluminium, paper and copper scrap

-  it is unlikely that such restrictions would apply to the UK as our standards are currently EU standards and can be expected to remain equivalent to EU standards

-   Because Turkey is inside the EU Customs Union it must impose the Common Customs Tariff on goods imported from outside the EU

 

-   Yes for most types of manufactured and agricultural goods

-  98% of goods subject to a nil tariff

-  most other goods subject to an interim tariff falling to nil within 10 years

-   No

-   Under the WTO’s General Agreement on Tariffs and Trade, the maximum tariff the EU can impose on goods imported into the EU from a WTO member (such as the UK) will be its Most Favoured Nation rate, which is the lowest tariff it charges to any WTO member with which it does not have a specific trade agreement.

-   The UK could impose equivalent tariffs on imports from the EU, or could adopt Hong Kong’s unilateral free trade approach of imposing no import duties at all

 

Free movement of people

-   Yes, as an EEA member

-   Schengen member

-   Norwegian professional qualifications are recognised in the EU

-   Yes, provided movement is for the purpose of taking up an offer of employment and the person departs when their employment comes to an end

-   Schengen member

-   Swiss nationals may travel on business in the EU for a maximum of 90 days a year

-   Swiss professional qualifications are recognised in the EU

-   No

-   Not a Schengen member, but free movement for Turkish nationals within Schengen currently being discussed

-   No, but visa free travel

-   Free movement could be negotiated, or may be required by the EU in exchange for granting access to the Single Market

-   No

-   It is usual for advanced economies to permit visa free travel for tourism and business trips of up to 90 days a year to each others’ nationals

-   Currently the UK operates a points based immigration policy for non-EU nationals. This is the most likely starting point for UK immigration policy in respect of EU nationals post Brexit

-   EU Member States, except Ireland*, can be expected to impose similar restrictions on UK nationals as the UK imposes on EU nationals

 

Free movement of services

-   Yes, as an EEA member

-   Has benefit of the passporting regimes for financial services

-   Norwegian firms have the right to establish places of business in EU Member States

-   No, except for non-life insurance

-   Swiss companies do not have an automatic right to establish places of business in EU Member States and generally will need to establish subsidiaries based in the EU to operate within the Single Market

-   To the extent that Switzerland has regulation equivalent to EU regulation, certain financial products, such as funds, can be sold into the EU by Swiss financial institutions

 

-   No

-   Turkish companies do not have an automatic right to establish places of business in EU Member States and generally will need to establish subsidiaries based in the EU to operate within the Single Market

-   No

-   Free movement could be negotiated

-   South Korean companies do not have an automatic right to establish places of business in EU Member States and generally will need to establish subsidiaries based in the EU to operate within the Single Market

-   No

-   Under the WTO’s General Agreement on Trade in Services tariff barriers to providing services across borders are not generally an issue, however, non-tariff barriers to trade impede the free movement of services, even within the EU

-   UK companies will not have an automatic right to establish places of business in EU Member States and generally will need to establish subsidiaries based in the EU to operate within the Single Market

 

Representation within the EU

-   No formal representation at the EU

-   Has limited power of veto over legislation the EU proposes to extend to the EEA

-   Has power not to implement an EU measure adopted by the EEA

-  But if it does all the entire area of competence in which that measure falls would cease to operate, eg if Norway declined to implement an EU restriction on bankers’ bonuses, Norway’s financial services industry would lose its access to the Single Market

 

-   No formal representation at the EU

-   The EU has made it clear that it does not want to continue with the Swiss model

-   No formal representation at the EU

-   Turkey’s relationship with the EU is based upon its prolonged accession talks and the EU dictates to Turkey what it must do to bring its regulation up to EU standards

-   No formal representation at the EU

-   The EU’s deep and comprehensive free trade agreement with South Korea is a “living agreement” and the agreement will be regularly reviewed, extended and enhanced, with the consent of both the EU and South Korea

-   No formal representation at the EU

Contribution to EU budget

-   Yes

-   On a per capita basis, for EEA membership, Norway pays significantly less than what the UK per capita for EU membership

 

-   On a per capita basis, for its bilateral relationships, Switzerland pays significantly less than the UK pays per capita for EU membership

-   No

-   Turkey makes no contribution to the EU budget because it is a comparatively poor country

-   No

-   No

Free trade agreements

-   EFTA free trade agreements, plus Faroe Islands

-   Norway is free to conclude its own free trade agreements with any other nation

-   Norway does not have the benefit of the EU’s free trade agreements

-   EFTA free trade agreements plus China, Faroe Islands, Japan

-   Switzerland is free to conclude its own free trade agreements with any other nation

-   Switzerland does not have the benefit of the EU’s free trade agreements

-   Turkey cannot conclude its own free trade agreements with any other nation as it must apply the Common Customs Tariff to any imports from outside the EU

-   Turkey does not have the benefit of the EU’s free trade agreements

 

-   South Korea is free to conclude its own free trade agreements with any other nation

-   South Korea does not have the benefit of the EU’s free trade agreements

-   The UK would be free to conclude free trade agreements with the EU, EFTA and any other countries

 

For more information contact

James Shackleton, Legal Director
Leith  Al-Ali, Associate

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