Construction Contracts (England) Exclusion Order 2022

Lord Callanan Excerpts

Monday 13th June 2022 Grand Committee

Moved by

[Lord Callanan]

That the Grand Committee do consider the Construction Contracts (England) Exclusion Order 2022.

[Lord Callanan]

My Lords, I beg to move that the draft Construction Contracts (England) Exclusion Order 2022, which was laid before the House on 11 May 2022, be approved.

These regulations exclude two specific types of construction contract from the provisions of Part 2 of the Housing Grants, Construction and Regeneration Act 1996, often referred to as the construction Act. Both contract types form part of a new procurement delivery model developed by Ofwat, known as direct procurement for customers or DPC, for the finance, design, building, operation and maintenance of high-value water and sewerage infrastructure. Before I set out the details of this exclusion order, it might perhaps be helpful to touch on the legal context for construction contracts.

Specific construction payment and dispute resolution legislation has now been in place for more than 25 years. Part 2 of the Housing Grants, Construction and Regeneration Act 1996 creates a framework for fair and prompt payment through the construction supply chain and a resolution procedure for disputes. The aim is to improve cash flow and provide the right to the quick resolution of disputes through adjudication.

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[Lord McNicol of West Kilbride (Lab)]

Oh!

[Lord Callanan (Con)]

Yes—very good. There is a pipeline of potential projects that could adopt this model, and the Government believe that its use will deliver benefits to consumers. Through increasing competition in the delivery of strategic infrastructure, it will ensure that the cost of this infrastructure is market tested and therefore fair for water and sewerage customers. I apologise for the complicated nature of the explanation and I commend this instrument to the House.

[Baroness McIntosh of Pickering (Con)]

I am sure that we are all very grateful to my noble friend for presenting this document. I am sure that he will be aware of the vexed issue of sustainable drainage systems—SUDS—in relation to the provision of water and sewerage services. So I ask very specifically whether the implementation of SUDS will be affected and enhanced by the exclusion in this regulation.

Paragraph 7.3 of the Explanatory Memorandum says:

“The instrument is limited to a specific procurement model for high value infrastructure assets in the regulated water and sewerage sector ... There are two projects under active development and a further 18 strategic water resource schemes are being progressed ... across the next 2-3 price review periods”—


so we are looking at a period of 15 years. As we are told that the significance and the business impact of this is estimated at £54,000, how will this enhance the ability to introduce SUDS and other larger water infrastructure projects if it is such small beer? That is the only issue that I will raise; otherwise, obviously I approve this instrument.

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[Lord Callanan (Con)]

I thank noble Lords for their valuable contributions to the debate. Let me start by emphasising, as I did initially, that this exclusion order is very narrow in scope. It is well defined to ensure that it is used only for the intended and very specific contracts that I referred to. These are the two specific construction contracts that are used to deliver the direct procurement for customers model for high-value infrastructure assets in the regulated water and sewerage sector.

Let me also emphasise that the creation of an exclusion under this Act is very much an exception and not the rule. DPC is a competitive delivery model focused on accelerating the delivery of strategic infrastructure in this particular sector. The current absence of an exclusion for these specific contracts threatens the viability of DPC and the very great benefits it could bring to consumers. That position has been confirmed through consultations with appropriate stakeholders. That is the reason the Government have chosen to use the powers conferred on them to make exclusions from the provisions of the construction Act in this particular, limited, isolated case.

I shall now deal with the questions I was asked. First, to my noble friend Lady McIntosh: SUDS are not currently associated with the schemes being developed but may be, in the future, if they are of sufficient size to be required.

The noble Lord, Lord Berkeley, asked for details of the projects. The first project is United Utilities Water’s Haweswater aqueduct resilience programme, which I am sure the noble Lord is very familiar with. It is to replace the existing Haweswater aqueduct, which is at risk of failing, which currently transfers water from the Lake District to north-west England, especially Manchester. The second English project is sponsored by Southern Water, and it is to deliver water to the south-east of England. United Utilities Water’s Haweswater aqueduct resilience programme, a very large project, will replace parts of the Haweswater aqueduct, which brings water to Cumbria and Lancashire. Southern Water’s Hampshire water transfer and water recycling project is required to ensure supplies to the Hampshire region. It is able to meet, apparently, one-in-500-year droughts. That is the second scheme I referred to.

In response to the question asked by the noble Lord, Lord Fox, as I emphasised again, the exclusion order is narrow in scope, and it is well defined to ensure that it is used for these particular, intended contracts only—the two specific construction contracts that are used to deliver the DPC procurement model for high-value infrastructure assets. Those entering into the procurement mechanism will, of course, have full knowledge of the terms including that payments during the construction phase will be made at specified intervals and that payments made through the unitary charge will commence only once the asset is capable of operating. Importantly, alternative dispute resolution mechanisms will also be included within the CAP contracts. All remaining construction contracts through the supply chain of the DPC projects—and, let me emphasise, in particular those appertaining to SMEs—would, of course, remain subject to all the relevant provisions within the construction Act.

In response to the question from the noble Lord, Lord McNicol, this instrument is limited—

[Lord Berkeley (Lab)]

I am grateful to the Minister, but before he moves on, could he explain why the regulator, or the Government, thinks these very large contracts should be treated separately and differently, rather than having several smaller ones, as it may be, where the risk of things going wrong might be lower?

[Lord Callanan (Con)]

As I said, these are specific to a unique procurement model which is being trialled and which we think will be appropriate in the water and sewerage sector. We therefore think it appropriate to exempt these particular, very large contracts to enable the model which effectively, as far as the companies are concerned, delivers the construction, management, maintenance, et cetera of very large construction projects. It is a unique procurement mechanism which we think has the potential to benefit customers in the future, so in this very limited case it was deemed appropriate by the Secretary of State to exempt them from the regulations.

[Lord Fox (LD)]

I shall further demonstrate my confusion on this statutory instrument. I think I heard the Minister say that payment to the tier-one supplier could be delayed until the point at which the service has been delivered, but that payments to those lower down the supply chain would not be delayed. If that is the case, there is a significant cash flow issue for the tier-one suppliers who are not necessarily robust in cash, as we have seen in other projects. Has the department carried out an impact assessment in cash terms on the tier-one suppliers who would potentially be taking a knock here?

[Lord Callanan (Con)]

In essence, the noble Lord is right. The regulation exemption will apply to the main, overall contract, but the separate contracts that will exist lower down the supply chain with SMEs will still be subject to the provisions of the construction Act. I suppose the answer to the noble Lord’s question is ultimately it is for the main supplier to price in the risk. Of course, if it wants to be paid, it needs to deliver on the contract and on the service that it is being contracted to provide. As in all these things, it is about providing the right incentives and fair value for the taxpayer or, in this case, the water bill payer, and for the main contractor to deliver the project as efficiently as possible. Ultimately contracts between the lower-tier levels and smaller SMEs are still subject to the provisions and they will need to be paid in any case.

In response to the question asked by the noble Lord, Lord McNicol, this instrument is limited to a specific procurement model that Ofwat wants to use in the regulated water and sewerage sector. He referred to the consultation. That was held through individual and group meetings with the relevant construction industry and with water sector stakeholders and was undertaken over a two-month period.

I was asked a question on pay when paid.

[Lord McNicol of West Kilbride (Lab)]

I understand when the consultation took place. The bit I could not find when I was reading the statutory instrument was the response to the consultation and whether that has been published on the website or shared at all, because I could not find any information on the consultation. I knew exactly when it was and what happened.

[Lord Callanan (Con)]

It was not published, but I would be happy to send the noble Lord a letter with the details of the consultation in question.

I was asked a question on pay when paid. Again, it is quite technical. DPC first-tier subcontracts are not excluded from Section 113 of the Housing Grants, Construction and Regeneration Act 1996 under this statutory instrument. This means that pay-when-paid clauses are not permitted. Instead, payments will be made according to an agreed schedule for the delivery of the project.

The basis of DPC is to provide better value for money for customers, ultimately, and bills are expected to be lower than they would have been if the schemes were delivered by regulated water companies via the traditional business-as-usual model by which companies’ prices are set. The first-tier contractors are expected to be part of the highest-level CAP and they are responsible for funding the delivery of the schemes under those contracts.

I hope that I have been able to satisfy the Committee on the questions that were asked—obviously not.

[Lord Fox (LD)]

I apologise for labouring this point. First, an observation on the Minister’s answer to my last question is that, if I were a tier 1 contractor factoring in the risk to my cash flow, it would increase rather than decrease my price, because I would be taking some sort of insurance or loan to finance the flow of cash through my business. So I do not quite get the idea that competitiveness would work in the way the Minister is depicting.

I am struggling with why, and why now. Are there historic issues with delivery that have caused the department and the Government to want to push this model through this statutory instrument? We cannot simply point to the construction Act being there; the construction Act is there, but projects have been going on. What specifically has caused this to happen now? I still do not get that.

[Lord Callanan (Con)]

While Ofwat’s regulatory regime has been successful at challenging the performance and efficiency of what are ultimately monopoly companies, in some areas, such as the delivery of major infrastructure projects, we believe that competition can deliver greater benefits for consumers. That is why, with advice from the regulator and the appropriate consultations, we think that these procurement models will deliver better value with a greater competition benefit for consumers—which is why we are introducing them. I hope I have satisfied the noble Lord’s question and I therefore commend these draft—

[Noble Lords]

Oh!

[Lord Callanan (Con)]

Ultimately, of course, previous contracts have delivered and been successful, but we think that a different model, involving more competition, could deliver better value for consumers, which is why we have produced these regulations. I therefore commend them to the Committee.

[Lord Berkeley (Lab)]

I am grateful to the noble Lord again. Following his last comment—

[Lord Berkeley (Lab)]

The noble Lord mentioned Southern Water as an example of the need for competition, and I am sure he is right about the need for competition—but who is competing? Is Southern Water competing against somebody else or are two contractors that are reporting to Southern Water, as the principal, competing? How does it work?

[Lord Callanan (Con)]

I will write to the noble Lord if my answer is not correct, but my understanding is that Southern Water is the procurer and will be regulated by Ofwat within the overall monopoly structure of the water industry. This is why strict regulation and price controls are imposed on water companies. The idea is that a company will be able to involve competition in selecting contractors for the delivery of particular projects. So the company will be the procurer, albeit under the overall model regulated by Ofwat.

Motion agreed.