Draft Construction Contracts (England) Exclusion Order 2022

Bill Esterson Excerpts

Wednesday 29th June 2022 General Committees

[Bill Esterson (Sefton Central) (Lab)]

It is a pleasure, as always, to have you in the Chair, Mr Gray. I am grateful to the Minister for his in-depth explanation of the order, but I will perhaps tease out further one or two of the points that he made.

The Minister quite rightly made the point that the construction Act was designed to address, among other things, the very real concerns about poor payment practices, particularly through construction industry supply chains. It addressed the way in which pay when paid was used to undermine the interests of smaller firms and self-employed contractors. It explained the rationale, and the fact is that this has been used previously.

What the Minister has said, however, raises a number of questions, some of which were raised in the House of Lords. The Lords Minister’s answers raised additional questions, which the Minister has not quite addressed this morning. First, he mentioned that the tier 1 provider would often be part of the special purpose vehicle. Could he clarify how often that is likely to be the case? In circumstances where it will not be the case, what protections would there be through the supply chain? I can perhaps pre-empt his answer, because he did say that whoever the contractor is would be aware of the terms and the dispute resolution mechanism.

Cash flow was also raised in the House of Lords. Given what has been said by the Minister, the explanatory memorandum and in the House of Lords, I believe I am right in saying that payment is due to the tier 1 contractor when services are delivered. That gives rise to a question about the timeframes. If payment is made after one month, that should not adversely affect the cash flow and ability of the tier 1 contractor to pay SMEs, self-employed contractors and the workforce more widely. However, what are the implications if payment is made after six months or longer? I take the Minister’s point about the SPV, but what protection is there for those contractors who are not part of it? That seems to be the key challenge to tease out, to make sure they do not end up with cash-flow problems.

We are all acutely aware of what can go wrong in the construction industry. In recent years, Carillion left £2 billion unpaid to its supply chain. I am not suggesting for one minute that this is another potential Carillion—it is on a very different scale and, as the Minister has set out, it is a regulated situation—but ultimately this comes down to cash flow. I am concerned about what happens if tier 1 contractors are not in a position to ensure their cash flow because of the way in which contracts are let and agreed, in spite of their awareness of the terms up front. We need to do everything we can to avoid problems through the supply chain for SMEs, self-employed contractors and the workforce. That is the key point.

On a related point, I want to tease out whether the concerns I have raised are the same as those raised in the consultation responses. I gently say to the Minister that it would be helpful if we could see the consultation responses before we debate statutory instruments, so that we can scrutinise the concerns that were raised with Ministers directly. It was helpful of him to draw our attention to what some of those concerns might be, but could he confirm whether I am correct in assuming that the people consulted raised the same concerns as me, or did they raise other concerns?

That covers the main points. In essence, I would like to hear from the Minister whether pay when delivered is in danger of getting close to pay when paid, and how that will be avoided and policed. Ultimately, if there is a situation where cash flow is problematic, how does he envisage ensuring that that does not create problems through the supply chain for SMEs, self-employed contractors and the workforce?

[Lee Rowley]

Many thanks to the hon. Member for Sefton Central for his constructive questions and comments. I will try to take them in turn, although I will take the third one first. I was not in the specific consultation meetings, but as I understand it consultation was undertaken over a number of months. I mentioned in my speech some of the things that the hon. Gentleman has pointed out. I will cover those in a moment, including the need to ensure that the model and the cash flows work and that ultimately those companies further down the supply chain can still get the money they need for the services that they pay for.

The consultation covered a significant number of operators in both the water industry and the construction industry, ranging from Balfour Beatty to Build UK, the Civil Engineering Contractors Association, Costain, Deloitte and EY. There were roundtables with water companies covering Yorkshire Water, South West Water, Welsh Water and United Utilities. My previous comments were a fair reflection of the aggregate opinion, which is that they are content to progress and recognise that this has the potential to be an important new tool. They want to make sure that the contracts are organised in a way that minimises issues, but also recognise that there is risk and that that has to be priced in through the commercial transactions undertaken either when people or organisations join the SPV or contract into it.

[Bill Esterson]

The Minister mentioned the consultees and named some fairly large businesses. Were SMEs and those further down the supply chain part of the consultation? What were their responses?

[Lee Rowley]

A number of industry bodies were consulted, including Build UK and the Construction Leadership Council, which try to take a holistic look at the views of the industry as a whole. In my other role, as construction Minister, I work with them very closely and know that they try to ensure that they prioritise the views of all across the industry, not simply those who may speak with a louder voice, for whatever reason.

Let me turn to the other two points, which are important and I am happy to address them. We hope that the special purpose vehicle will be a tool that can be used to bring forward significant infrastructure improvements in the future, but the ultimate decision about how it would be set up in the one, two, three or n number of cases where this happens will be down to the organisations that want to go into those SPVs. The hon. Gentleman asked how likely the first-tier contractor is to be part of the SPV or its entity, but I cannot give him a number, a percentage or an expectation, because ultimately that will be down to the market to determine. However, experts and officials have indicated that, given historical precedent and what companies that play in this space are likely to do, they would expect those companies building this infrastructure, such as pipes or sewage improvements, to take an early interest in the discussions and the transactions. It is not unusual for such companies to be in similar financial structures early on in the SPV process, but that will ultimately be down to them.

That leads on to the second question, which is how do we make sure that there is not a problem of payment further down the supply chain. There are two broad answers to that. First, for those who are not first-tier suppliers, the same requirements apply around payment as they do today. The contracting that would be undertaken for tier 2 suppliers would be undertaken on the basis of the construction Act, and that Act and the scheme of construction contracts contain clear clauses about payment upon delivery, not payment when other organisations or entities choose. That is not changing.

What is changing is, in effect, the box before that. The SPV and the first-tier operator will need, either through being a group of one or through the SPV contracting to a tier 1 operator, to price in risk appropriately and organise themselves appropriately. They will also need agreement with their funders to ensure that they have cash available at the point at which they will need the working capital to pay tier 2 suppliers or whoever they are contracting, to ensure that the output is delivered.

That is fully transparent at this stage, and that is exactly what the DPC is designed to do—to allow private companies to go out and seek investment to cover the build element, including tier 2 suppliers, and then recognise that they will start to get a revenue stream at the point when the infrastructure is delivered. That is entirely the point of it. The revenue coming from the water companies will not start until delivery. That means that if this works, and we have confidence that it will, the risk to the public purse is minimised because companies pay on results, not on proposal, and because a set of companies and individual actors will be entering into a contract to ensure that they price the risk of delivery appropriately and deliver it to get a long-term revenue source from the Government. I hope that those answers resolve the points raised by the hon. Gentleman. I am grateful for his contribution.

To conclude, I reiterate that the creation of any exclusion under the construction Act is the exception.

--- Later in debate ---

[Bill Esterson]

The Minister has said that there has not yet been an example of this disapplication, so we are not in a position to judge it. There are, however, two earlier examples of where the construction Act has been disapplied. Are those examples relevant or are they different and, therefore, not relevant?

[Lee Rowley]

The reason the Act was disapplied in 1998 and 2011 was, in effect, the private finance initiative. PFI has a different structure whereby the Government are still involved in contracting out the cost. The order, however, relates to the arrangement between two private parties—the water companies and first-tier building contractors—though admittedly for a piece of infrastructure that will be important to the citizenry of the United Kingdom. It will, however, be a different prospectus. I do not, therefore, think that we can draw conclusions from the previous disapplications. That is why we want to tread carefully, and why Ofwat is keen that we have some early pathfinders, so that we can learn and understand that the proposal works.