Member blog: Assessing Brexit through infrastructure lens
If Covid has taught us anything it is that we have got to be quick to change and adapt. So whilst I am not super-optimistic about the Brexit deal that has been agreed, if we change some of our thinking and approaches then I find myself being more optimistic. Is Brexit an impact we need right now? I don’t think so. It is piling on more uncertainty, even now a deal has been done. But there are undoubtedly opportunities out there and the more optimistic we are the greater chance we have of a better outcome.
As specialists in infrastructure investment and economics, and the relationship with wider economic development, the lens I would put on this is the impact that Brexit will have on the infrastructure sector – and the impact that could then have on the levelling up agenda. Infrastructure is clearly an important part of the economy. Estimates put it at around 7% of GDP, the sector employs upwards of three million people, so it is a significant driver and heart to the economy. The policy direction that has come out over the past six to nine months, and accelerated by Covid as well, is the role of infrastructure in the rebuilding of the economy: not only the recovery, but the levelling up agenda.
Yet of all employees in the infrastructure sector, probably 10% are EU migrants, so the expectation is that Brexit one way or another will deliver some significant impacts across a number of different areas. I think we will initially see skills shortages exacerbated by the large number of migrants not being here, which will impact on projects and project delivery. Skills is a constant struggle in a number of sectors – the right skills and the right sort of people – and clearly the old relationship with Europe helped the skills shortage and skills gap in a long way.
From sectoral point of view, which is very labour intensive, businesses been very reliant on a European workforce. That reliance grew up through the EU mechanisms. We have partially turned off the European tap, and it is how we turn on taps in other parts of the world that will determine the balance and where we actually end up. To replace that we are looking at labour from other parts of the world. It will play out over time, but there is a structural shift needed and there will probably be less interest in certain countries in coming across to the UK.
We will still need the same level of employment and skills if we are going to achieve the same growth in the levelling up agenda that is out there so other locations will have to play a part in giving us the skills we need. Maybe it will be just as bureaucratic for people from the European Union to get a visa and work here as it is for people in other parts of the world. But at a practical level it puts our European colleagues and talent into the same environment that everyone else is in. That means there are more hurdles and bureaucracy in front of them before they start.
Then there is other uncertainty and disruption. The European Investment Bank has been a long-term source of finance for infrastructure, particularly around major projects, and that is worth upwards of £5 billion per year. This will need to be replaced by other sources, whether private finance or otherwise, but in the clamour to do that we are going to have to look at different mechanisms and setting up a UK Infrastructure Bank is going to take time.
From an investment funds point of view I don’t think we will see any significant change in European-based investment funds. Foreign direct investment and setting up companies here is different from the investment flows. From a transactional investment lens we are aware of a lot of investors, and a lot of investment waiting to be placed, and they have been waiting for Brexit to be resolved one way or the other before key decisions are made. Once some of the uncertainty starts drifting away I expect that we will see an increase in the number of deals and level of investment coming in. There still seems to be a lot of optimism, it has just been held back as a result of Brexit and Covid.
There is obviously damage to weakened parts of the economy. The regions within the UK that have a particular economic base, and weaker economies, are probably more exposed to these impacts. Brexit will also impact procurement and costs in terms of the weakened pound and possible tariffs, so we could see high costs and lengthier procurement processes as a result. A lot of materials are imported, and there is a knock-on effect on the supply chain.
The recent raft of policy directions, ‘Build Back Better’, levelling up and greening up, are very exciting and innovative, and does place us in a good position in terms of the UK grabbing some of those agendas. If we do that, I think investment and opportunity will come out of it. But the proof will be in the pudding. Policy papers and words are great, but translating that is less easy without the right detail behind it.
Like everyone we are waiting to see where the landscape sets but, despite the initial shocks that are coming, I remain the external optimist.
Steve Scott is Executive Advisor UK, Europe & Middle East, Infrastructure Investment and Economics, at GHD, a member of the Institute of Economic Development