But another important cause of the underspend was a change in accounting procedure, which means that government departments can now roll budgets over from one year to the next. This prevents a rush to spend money at the end of the financial year, but it also has the effect of delaying public spending. The IFS estimates that more than £3bn of spending was carried forward from 1999/2000 into 2000/01.
PFI schemes have also suffered as a result of the government's spending prudence. Spending for all PFI schemes was £1.6bn in 1999/2000. This compares to a projection of £4.2bn in the 1998 budget.
Mark Hake, a construction analyst with investment bank Merrill Lynch, confirms that public sector spending on construction has not matched expectations since Labour came into power. "There has been a delay in work coming through to tender for public sector and PPP [PFI] work," he says. "This is because there has been a steep learning curve to go through with procurement reforms. That has passed now, and there will be an element of catching up to do. We expect to see a lot of public sector work coming through in the next four years."
NHS and Defence Estates
Although industry experts agree there has been a government underspend in construction, hard data is difficult to obtain. NHS Estates and Defence Estates don't actually spend money on construction. Rather, they manage projects for NHS trusts and the armed forces respectively.
Neither agency holds figures on how much is being spent on construction in its department, which raises a question: if they don't know how much is being spent or underspent, how can contractors plan their future workload and staffing requirements? Everyone knows New Labour is the master of spin - making one sum of money sound like three. For example, you may have felt excited about the £180bn announced to improve infrastructure in the 10-year transport plan last July, until you realised this wasn't new money, but part of the Comprehensive Spending Review, announced just days before. The headline-grabbing announcements may sound hopeful, but as the figures show, they don't add up to money spent.
What are the reasons for this underspend? Is it the new accounting procedure, the complexity of procurement reforms, political wrangling (such as over the upgrade to London Underground) or the fact that government departments just aren't accustomed to spending money? A spokesman for the Highways Agency says that it has met its targets. "We have spent very close to our limits in the last two years, and haven't really been affected by the government underspend." Its annual report for 1999/2000 bears this out, with an estimated underspend of only £1m.
A spokeswoman for Defence Estates says there is no evidence to suggest it has underspent its allocation for construction and that it expects a substantial increase in construction work in the next 10 years.
However, contractors' experiences with prime contracting tell a different story. Although the pilot scheme Building Down Barriers, with Laing and Amec, was heralded as a success, disputes over clauses, risk sharing and culture change in Defence Estates has threatened prime contracting throughout its history. The large regional contracts, worth from £200m to £300m a year, were first publicised in autumn 1998 and advertised in the Official Journal of the European Union in November 2000. But the first contract wasn't let until February this year.
Kate Priestly, chief executive of NHS Estates, admits there has historically been a problem with underspending at the agency. "The availability of sums has always outweighed the demand for schemes, and sometimes the process can get in the way of speedy procurement. We now have the capital to spend, and with Procure 21 [NHS Estates' new procurement scheme], the method to speed it up." But she acknowledges that a huge culture change must take place in trusts to make Procure 21 work. "The biggest challenge we face is getting the message through to the staff who will manage projects in trusts. We accept the industry's criticisms that we need to be a better client and improve the capabilities of individuals."
The Local Government Taskforce has just issued new guidelines on best value, because local authorities are still having trouble getting to grips with the new council procurement process. A Financial Times article in December 2000 reported: "Local authority capital spending has been slow to take off.
The Local Government Association says that after years of capital squeeze, councils lack the staff with the experience of handling big projects. Public sector experts say staff shortages and complex tendering processes have helped lead to the shortfall [in spending]."
Michael Ankers, chief executive of the Construction Products Association, says a culture change is required in government to accommodate the reforms and free up public sector cash. "When it came into office four years ago, the government promised £5bn to improve social housing, and still all that money hasn't been released. There seems to be a problem with gearing up local government to deliver these reforms.
We have been saying to government for the last year that there are too many hoops to jump through with PPP
Stephen Ratcliffe, chief executive of the Construction Confederation
Local authorities have for so long been used to saving money and making cutbacks, they have a problem with spending money and working to best-value ideals." James Hastings, a client services manager at Construction Forecasting Research, a construction economics research company, says that projects under the Capital Receipts Initiative, which was set up in 1997 to allow local authorities to use money from the sale of council houses for infrastructure improvements in the local area, have taken upwards of two years to get on site. "There are so many stages involved in getting one of these projects off the ground that even small projects can be subject to big delays," he says.
Social housing alone was set to benefit to the tune of £2.3bn by 2001/02 through the scheme. That money has yet to appear in any significant sum.
The expense of PPP
Stephen Ratcliffe, chief executive of the Construction Confederation, says that public-private partnerships are slowing the flow of money from the government. "There are too many hoops to jump through," says Ratcliffe, "and the process to bid for PPP is too expensive. We have been saying to government for the last year that the bidding process can take months." The government intends to complicate PFI schemes further by including clawback clauses to prevent excessive profits by contractors. For example, the government cited Carillion's Fazakerley PFI prison scheme, which generated £30m of profits for the contractor and its partners.
Bob Hamblyn, managing director of London-based contractor Crispin & Borst, expects his public sector workload to remain buoyant, but he is worried about procurement reform. "PFI schemes took a long time to convert into useful building work when it was first introduced, and the same thing could happen with Procure 21. We do a lot of work for NHS trusts in London, and relationships with those trusts are vital. If larger companies are imposed on trusts, as will probably be the case with Procure 21, it will only add a tier of outside management, distance the trust from companies such as ourselves and slow the whole process down." The construction industry has already spent a great deal of time and money in preparing itself for government reforms. Galliford Try is just one contractor that has created the role of PFI director specifically to deal with that type of contracts. Added to the cost of supply chain managers, it all creates more expense for contractors.
The supply chain needed to qualify for PFI, prime contracting and Procure 21 doesn't come cheaply either. Vaughan Burnand, managing director of Shepherd Construction, says the amount is hard to quantify exactly, but the process is very expensive. He is angry about how little work is coming through: "We have run more than 20 supplier workshops and made 100 visits to preferred suppliers over the last five years, all of which takes a day at a time. I have personally spent a lot of time running workshops and going to seminars to help Defence Estates and NHS Estates get prime contracting and Procure 21 off the ground, and it has resulted in virtually no work."
Doing without government work
"Contractors have learned to do without government work," he adds. "Our business used to be 50:50 between private and public. Over the last three years that has changed to about 85:15. The industry has given the government a big response to these reforms, and the amount of work we have got back in return doesn't justify it." Despite emphasis on best value and the procurement reforms, the Office of Government Commerce, an agency of the Treasury, has created another hoop for projects to leap through. Every public-private partnership will now have to satisfy five criteria to get the go-ahead from the OGC as part of its Gateway Review. These are: justifying the business case, approval of a procurement method, approval of the contract, demonstrating that the project is ready to go live and demonstrating that it has delivered planned benefits. In the next year, about 65 construction projects will undergo the review. The review panel will consist of independent experts, under the guidance of the OGC. Hospitals and schools won't be covered by the scheme yet, though they may be in the future.
The aims of the review are to shave costs by 5%, to standardise procurement for PPP projects and to prevent failure in large projects. Deryk Eke, OGC construction director, says the review is necessary because the early stages of a project were not being fully considered. "If a project is set up in the right way to begin with, it has more chance of success. Spotting a bad project early on is very important." He adds that he hasn't seen any evidence of an underspend in construction, but that getting government departments to focus on best value has taken time.
"Achieving Excellence, which was launched two years ago to address getting value for money is now starting to have some effect. A cultural change had to take place in government departments, but the industry has to recognise there is an alternative to 'business as usual', too." And it's not just in the area of procurement that the government is slowing down the construction industry.
In its desire to protect Britain's greenfield land, the government has further complicated the planning system to encourage brownfield development. It wants 60% of all new housing to be built on brownfield sites, and the DETR now has the right to veto large greenfield developments. Planning Policy Guidance (PPG3), new government guidance on where to place housing developments, gives more power to local authorities to decide on issues such as density, design and mix of housing schemes, which can only further delay the process. Add to that, in the London area, the stipulation that every housing scheme must contain 50% affordable housing or housebuilders must pay the Greater London Authority compensation.
Longer planning times seem inevitable.
Steve Lidgate, chief executive of Laing Homes, says that over the last two years, the average time from lodging a planning application to building the first house has risen from nine to 14 months. The government aims to process 80% of planning applications in eight weeks. The other 20% can presumably take much longer.
More responsibility
"The trend in recent years has been to give more responsibility for planning to the local community," says Lidgate. "When this government came into power it realised the scale of housebuilding that had to take place, especially in the South-east, but no local community wants a development in its backyard." In the last year, Laing Homes has built fewer houses than in any year since the 1920s, excluding the war years.
Source
Construction Manager
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