Brexit Considerations This paper has been written to set out the potential implications for the construction industry and CITB following the EU referendum result. These have been categorised into short and medium-term issues (as there is no real visibility on the longer term at present), with actions indicated where required. We are seeking your views as to whether we have identified all of the key issues and actions. In addition, are there areas related to the referendum decisions on which you believe CITB or a wider group of industry players should be engaging with government? Short Term implications 

Economic impact – forecasters (including Experian, who run our CSN model) were already downgrading growth figures before the referendum – not just for construction, but for the wider economy. The Consensus forecast for growth in the UK economy in 2017 has been revised down from 2.1% to 0.3%, and these figure are likely to come down further. It is now almost certain we will see a period of much slower growth and likely, a recession. Given its greater sensitivity to swings in sentiment and investment decisions in other sectors, the impact on construction is likely to be larger than this. The length and depth of this will depend on how quickly uncertainties are addressed. These are also likely to have a longer-term impact on the economy and on the rate of growth in construction, though the extent of any long-term impact is hard to gauge until some of the key decisions on our relationship with EU have been made. Although the events of the last week have been dramatic, it is important to note that there are plausible scenarios in which the UK’s trading relationship with EU does not change significantly and where the key issues are resolved quickly. In this case, the economic impact could be relatively short-lived. However, it is more likely that, even if the overall picture becomes clearer fairly quickly, there will be an extended period in which some of the more contentious issues are resolved. Equally, there are more worrying scenarios in which decision-making is more protracted and where the economic and political fall-out is more widespread both across the UK and within the EU. Amongst the tailwinds is the negative impact on consumer spending from uncertainty, a weaker pound raising the cost of imported goods, and fears of tax rises in the Autumn Statement. The same factors will weigh on business investment which had already started to slow in the run up to the Referendum. Action: To gauge the implications for skills, CITB will issue a revised CSN forecast. The timing is important, as we need to ensure a new forecast doesn’t just reflect initial market volatility, but rather gives a considered view on the likely impact for the coming years. This will be based on Experian’s revised macroeconomic forecasts (sense-checked with construction employers), and we expect to publish in early September. In the meantime, we will prepare some estimated ‘ranges’ of potential impact on skills demand (the Annual Recruitment Requirement) based on the experience of past downturns. In the short-term, we will use our regular industry surveys to gauge sentiment and what this means for recruitment and training decisions. We will also work closely with employers and Federations to ensure that our intelligence is up to date and to discuss what further actions CITB should be taking to support them.

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Major projects – some delays to major projects are likely. The decision on airport expansion in the South East has already been delayed due to political events, and there is speculation that

HS2 could also be held up due to both Parliamentary approval and affordability concerns. There could be further delays to nuclear new build and other projects which rely on inward investment (including from other EU member states). It will be important for CITB to take a view on these impacts but equally it should not add to the already increased uncertainty by publicly speculating about them. This is a significant risk to overall construction output, particularly given how strong a driver infrastructure is for the current growth forecast. There is a potential knock on effect for skills. All of this is a major concern for industry, and could also affect CITB in terms of Levy collected, ability to accurately predict skills needs, and the mix of training provision required. Action: Monitor developments and maintain Partnerships engagement with major projects. 

Skills Policy– with the Government and Civil Service prioritising the exit from the EU, and the added complexity of a Conservative leadership contest, key skills policy and funding decisions could be delayed or face significant inertia. There has already been a delay to publishing more detail on the Apprenticeships Levy, although the Skills Minister has given his assurance it will be introduced as planned in 2017. Other policy areas of interest to construction and CITB include the Area-Based Reviews, Apprenticeships Funding (both in England and the use of the AL in the nations), Sainsbury Review of Technical Education, Devolution of Adult Skills Budgets to English Regions, the Careers Strategy, Bonfield Review, etc. Action: We will continue to engage with contacts at BIS, DfE, DECC, No. 10, etc. to keep tabs on policy development and push for clarification where possible.

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Consensus – Given the economic uncertainty and knock-on impact for construction employers’ profits, companies may be less willing to accept paying two levies (albeit with the Transition Package offset), or support a new Levy Order. However, in previous downturns, CITB’s support has been valued by the sector in retaining apprentices, shoring up training levels, etc. There is also a general concern about how easy it will be to engage meaningfully with employers on a range of issues (not just Consensus), if their attention is focused on getting through serious economic turbulence. Action: We will continue on our agreed Consensus timeline and intensive engagement with levy payers, including those affected by both levies in 2017. We will investigate ways of providing extra support in the event of a serious downturn, and reflect this in our reforms to the Grants Scheme. In planning engagement with employers, we will take account of the pressures they face, and reflect that in the options for how they can share their views.

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Reform of Grants Scheme – the planned review of CITB’s Grants Scheme will be affected by a significant economic downturn. Levy payers facing increased budget pressure may find it more difficult to look at the strategic, long-term funding needs of the industry, and it may therefore be more difficult to get agreement on how grants should work in future. In past downturns, many employers have cut back investment in training to which is ‘mandatory’ or meets short-term needs. In this event, we will need to look at short-term funding interventions such as the incentives and Shared Apprenticeship Schemes CITB funded in the previous recession.

Action: We will continue the Grants Scheme reform as planned and explore targeted funding schemes to support the industry in a downturn, drawing on past experience and feedback from employers of different sizes and sectors. 

Training supply and partnerships – the industry could face a contraction in training supply, due to reduced demand, economic uncertainty and potential reductions in funding from Government. For CITB, this could make it more difficult to commission training, and establish partnerships with providers who may be less willing to co-invest or take on risk, particularly for new or specialist training. Action: Monitor developments and step up engagement with providers, including through the Right Training Strategy.

Medium Term implications 

Availability of migrant labour – about 11.6% of the UK construction industry is of non-UK origin. This table shows the most up to date figures (2014) for the biggest concentrations by nationality of people. These workers arrived in past ten years. It shows that six of the nine countries are from the EU and that these countries account for 88% of the total. Country of origin

2014

Poland

30,120

Romania

24,842

India

7,704

Lithuania

7,569

Bulgaria

5,443

Latvia

3,830

Hungary

1,448

South Africa

1,316

Australia

937

In time, restrictions may be placed on the movement of European workers to the UK, but this cannot happen until the Prime Minister formally triggers departure from the EU (Article 50). In the intervening period, it could be that EU workers come in greater numbers (while borders are still open), or they could drop off given the uncertainty of their future status in the UK. Action: Monitor levels of migration in 2016/2017; gather intelligence on likely reaction from employers to potential changes in labour flows; and reinforce the need to train UK workers to ensure a pipeline of talent for the coming years. 

Legislative impacts– there are a number of potential impacts for current UK laws emanating from the EU. These include health and safety, environment, procurement, State Aid etc. In time, and depending on the new relationship brokered with the EU, they could be redrafted or

scrapped to ‘cut red tape’, or to replace EU-initiated rules with UK specific ones. A few examples by subject area are below. Health & Safety - much of UK H&S legislation is based on EU Directives, but there is a widely held view within industry that some 90% of these laws would exist in the UK even without the Directives. Whilst various independent reviews have found the riskbased approach to H&S prescribed by the EU Directives is fit for purpose, there may yet be a push by Government to reduce the number or scope of the rules to cut bureaucracy. Once an exit is negotiated, however, unions will likely lobby for future legislation to be at least as robust as what is currently in place. There will also be questions over what standards need to be met for the UK to continue trading (or building) with EU countries. Sustainability and Innovation – the policy direction for this area is already in place via the UK Energy Act, which requires 80% reduction in carbon emissions by 2050. Energy Minister Amber Rudd also committed to an announced an ambitious interim target (known as a ‘Carbon Budget’) of 57% reduction by 2030, which is far tougher than the target set by the EU (40% by 2030). An exit from the EU will, however, affect the way the UK meets the target. EU directives tend to focus on reducing the demand for energy (in construction, through retrofit programmes and energy performance improvements), but once outside the EU, the UK can decide its own balance between energy efficiency and making energy production ‘cleaner’ (e.g. through nuclear). However, if UK firms wish to continue operating in the EU market, they will still have to meet the stringent EU building performance standards in order to compete. CITB’s current work around improving sustainability skills, especially energy literacy, is tied to the UK’s own building regulations. So this work will be largely unaffected. Innovation and technology improvements could however suffer in a slowdown in construction growth. 

EU Funding – there are several major sources of funding from the EU related to skills across the three GB nations. These include European Social Fund (ESF) and European Regional Development Fund (ERDF) projects. Impact on industry: England: There are 12 ESF funded construction projects within English LEPs which focus on supporting people into employment, social inclusion and workforce skills development. There are an additional 200 ESF/ERDF funded projects, which are not construction specific but have an element of construction e.g. low carbon or transport. Total value of EU funding to these projects is well over £1bn. Scotland: Current total investment of €941m split across the European Regional Development Fund (ERDF) and European Social Fund (ESF). These programmes include 11 ‘Strategic Interventions’. The two most relevant to CITB are Developing Scotland’s Workforce (worth £33m) and The Employability Strategic Intervention (worth £59m). Wales: Wales is a significant net beneficiary of European Funding. ESF programmes account for nearly £642 million of EU funds for West Wales and the Valleys and £162

million for East Wales. Losing this funding could affect Welsh Government skills and employability programmes such as the Apprenticeship Programme, Pathways to Apprenticeships and Jobs Growth Wales. An estimated 25% of apprenticeship programmes in Wales are supported by European funds. The ERDF programme is worth some £960 million for West Wales and the Valleys and £162m for East Wales. This is linked to infrastructure projects including the South East Wales Metro, the dualling of the A465 and improvements to the A55. EIB funding – in addition to ESF and ESDF funding, European Investment Bank (EIB) funding supported £5.6bn in the UK last year (and £42bn over the past ten years). The EIB has said that recent deals in the UK should proceed as planned, for example building an off-shore windfarm in Scotland, but there is uncertainty about future projects that would have been good candidates (e.g. infrastructure funding for Anglian Water). This is a further risk to overall construction growth, given the reliance on infrastructure build in the next few years. Impact on CITB: Contracts: In England, CITB has a number of contracts with the Skills Funding Agency, including the Managing Agency Contract (covering SFA Grants for employers and apprentices) and SFA Advanced learning Loans Bursary Fund. We also hold an annual contract with Skills Development Scotland for Modern Apprenticeships and with the Welsh Government for Apprenticeships there. The EU is a major contributor to apprenticeships in Wales, but it is not known how much (if any) EU match funding is in place for SFA or SDS contracts, as any match funding takes place before the contract is paid out to CITB. Action: It is too early to say what the impact will be of EU funding in the next few years. We will keep a watching brief and stay in touch with the skills agencies in the three nations. •

General election – if a general election is called before 2020, there will be an addition 6 week period of Purdah and a need to rebuild political relationships. The relationship building will already be underway given ongoing public affairs work, and the imminent Conservative Leadership Contest. But a General Election means building relationships not just with new ministers but a new cohort of MPs across the three nations. Action: Ongoing political monitoring and cross-party engagement.