UK Hydrogen Economy

Debate between John Spellar and Alan Brown

Thursday 17th December 2020 Westminster Hall

[John Spellar (Warley) (Lab)]

It is a pleasure to serve under your chairmanship, Ms McDonagh. I congratulate the hon. Member for Rother Valley (Alexander Stafford) on securing the debate and on his considerable enthusiasm and the detail with which he presented it. I think we all agree that hydrogen has considerable potential, but at present that is exactly what it is. I do not mean that in the way that the electricity industry talks about nuclear fusion—nuclear fusion is the future and always will be. I mean it as a call to action, so that we explore the production and utilisation of hydrogen at pace. One benefit of covid has been to demonstrate how, without cutting corners, we can evaluate systems and roll them out. We, particularly Whitehall, need to learn from that.

My hon. Friend the Member for City of Chester (Christian Matheson) slightly chided me to say that we were going off topic, but given the way that the Government work, it is absolutely crucial that we get to the heart of this and change the processes within government, otherwise we will find it very difficult to survive in this future world. Key to this is the civil service’s addiction to process, with extended timescales and time not being a factor. That is true under Governments of all parties. It is enormously important that Parliament relentlessly holds it to account to get things moving.

It could be argued that both Brexit and covid enable and also force the Government to change. That means that we are compressing processes but also, and equally importantly, paralleling them: trying different approaches, seeing what works, and seeing what does not work and shutting that down.

To start with transport, buses and trains are a considerable component of the hydrogen economy and contribute to clean air, particularly in urban areas—by definition—but an important issue is where they are made. Up until now, the Government have been indifferent to where they are manufactured. We have the capacity in Ballymena, Falkirk and Leeds to produce the buses, but what those facilities need, of course, is a market. They need to get on the manufacturing learning curve. The operators need to get the operational experience and find out what the issues and problems are. There needs to be continuing feedback between operators and manufacturers, and that will of course enable us to secure the export markets that have been mentioned.

It might be that, in some conditions, batteries will prove to be better. We need to test that out and assess what will work. We need to learn the lessons that have been mentioned before about where we missed out on batteries and allowed that work to go abroad. We have the largest installation of wind farms in Europe, yet so much is manufactured abroad. Governments, including devolved Administrations, have not focused on that enough.

On domestic heating, nobody mentioned that town gas is composed of a substantial percentage of hydrogen. It might be a much better answer, as was mentioned, than heat pumps for flats and terraced properties, which is a big issue in moving to alternative form of heating.

Also, we need to look at how the production of hydrogen will take place. Let us be realistic. If we are going to roll out the utilisation of hydrogen, some of that initially, but hopefully very shortly, will need to come from hydrocarbon sources. That might be dealt with by carbon capture, but I sometimes think that that is the easy answer that people trot out to deal with that. We need to move much more towards green sources of hydrogen, and we therefore need to look at the institutional barriers. It is truly extraordinary that in the first two months of this year, National Grid paid wind farm operators £72 million to not run their wind farms. That is absurd, and it has been going on for a decade.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

Is the right hon. Gentleman aware that £50 million was also paid out to turn off the nuclear plant? It is not just wind farms.

[John Spellar]

Indeed. I was not being dismissive of wind farms; I was talking about the institutional barriers. That is not a technical barrier; it is an institutional barrier. It is the same with nuclear. The problem is that in order to qualify for the renewable transport fuel obligation that was mentioned by the hon. Member for Rother Valley, new capacity has to be utilised. We have existing capacity, even though it is not needed. At the same time, we are paying the wind farm or nuclear operators, and that is acting as a barrier to producing cheaper hydrogen. These are the sorts of areas where Ministers, with the support of Parliament, need to be cutting through. We obviously also need to look at the question of energy storage—hydrogen is an effective form of energy storage—but we need to do a proper evaluation.

I am mindful of the constraints on time. I am slightly concerned about the Government’s announcements, because I would like to see a bit more cost accounting. I would like to see a proper analysis of how much each different system is costing. I am not saying that we should not have a subsidy at a certain stage. I would like to see it being a diminishing subsidy, because we have to exercise that rather than all having our pet theories and ideas, important as they are for driving the process. We need to make sure that this is affordable going forward. If we are to compete in an international market, that is where it will really be tested—whether something is affordable or not. I shall yield to the Chair and conclude my remarks.

Construction Industry: Cash Retentions

Debate between John Spellar and Alan Brown

Thursday 27th February 2020 Westminster Hall

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

I beg to move,

That this House has considered the use of cash retentions in the construction industry.

It is a pleasure to serve under your chairmanship, Mr McCabe. We all know the procedure for Westminster Hall—you know it better than I do, Mr McCabe. I move the motion and, at the end, everybody agrees that this House has considered the matter. In this case, however, the subject matter has been considered several times, yet for some reason the Government choose to do nothing about it, which becomes ever more frustrating. Small companies continue to suffer cash-flow issues because of late payment by retention or, even worse, non-payment, often because of insolvency of the larger company.

I intend to focus on the lack of Government action, but I should first explain what a cash retention is. An October 2017 report by the Department for Business, Energy and Industrial Strategy and Pye Tait Consulting defined a cash retention as

“a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed…to the required quality standard.”

Effectively, a retention is a cash bond withheld by the main contractor to cover any snagging defects in an agreed maintenance period of one to two years, and is intended as a lever to hold subcontractors to their legal contractual obligements to make good any defects in a set timeframe. The typical value is 5% of the works, which can create significant cash-flow issues.

At any one time, it is estimated that in England alone, between £3 billion and £6 billion of retention money is withheld. There is a logic to the origin of cash retentions, however, as an insurance policy or bond to ensure that work is completed to the desired standard. Of course, at one time, the only way to operate contracts was the use of cash, so there is a historical logic.

I fully understand, having worked in the construction industry, that retaining half of the retention money until the works are initially completed, and then releasing it, is a good incentive to ensure that work is done without leaving odds and ends. I also realise that during the snagging period, it can be hard to get a subcontractor back on site immediately to rectify snagging issues, because they have moved on to other projects and their resources are allocated elsewhere.

On the whole, however, the subcontractor will always return to remedy defects at their own cost, as per the contractual terms and conditions. As the retention money is seldom required to pay for snagging issues, it is due to be paid to the subcontractor at the end of a defect period. That is when subcontractors expect the money owed to them to be released.

History also shows us problems with cash-based retentions. Too often and for various reasons, the retentions are not released in a timely manner, or even worse, are not released at all. The most common reason for non-release is a company going into liquidation, but if the subbies fully comply with the terms and conditions in their contracts, why should their money not be released in a timely manner? Why, in the 21st century, are we dealing with unprotected cash retentions?

The worst recent high-level example of the effects of lost retentions was the collapse of Carillion in January 2018. Estimates of lost cash for companies are in the region of £250 million to £500 million. Just think how many small and medium-sized companies went bust as a consequence? How many training opportunities were lost because of the resulting cash-flow issues? How many subcontractors just decided that enough was enough, packed up and got out of the game?

[John Spellar (Warley) (Lab)]

The knock-on effect is even worse than that. The great long chains of subcontractors mean that a company that was not even involved on the site may be dependent on getting payment, for a completely different project, from the company in liquidation. The ripple effect, which basically undermines the ecosystem of our construction industry, has been considerable over many years.

[Alan Brown]

I fully agree with the right hon. Gentleman; that ripple effect can go all the way down to builders’ merchants and those who supply goods. It has a massive effect and we need the UK Government to do something about it.

I highlighted Carillion, and a further disparity is that for public sector contracts, for which tier 1 contractors are engaged, retention money is safe because the public sector will not go bust. Retention might cause tier 1 contractors some cash-flow issues, but their money is protected. In the case of Carillion, however, public sector clients will have retained Carillion’s retention money, which effectively included the subcontractors’ retention money. The subcontractors cannot get that money because they are legally creditors of Carillion. That shows an imbalance in the procurement process, because there is no regulation or guidance on how retention moneys are held or protected. If an employer enters into insolvency before the retention money is paid, the money is used to pay off creditors first—that is why changes are required.

In addition to the potential £500 million Carillion retention loss, the Specialist Engineering Contractors Group estimates that, in the last four years, £670 million of cash retentions has been lost to upstream insolvency, so for small and medium-sized enterprises, more than £1 billion has been lost in the system in that time. That highlights the need for Government action.

A micro-sized electrical business in the west of Scotland, which held a subcontract with Carillion, lost £40,000 in retention money when Carillion collapsed. Carillion’s client was the Ministry of Defence, which, ironically, did not hold retention money from Carillion. Carillion, however, took retention from the guys working for it. That subcontractor was lucky to survive, but could only do so by using reserves to plug the shortfall, cutting back on training, and cancelling plans to take on an apprentice. That single example shows the current imbalances in the procurement system and the impracticalities of using cash retentions.

The research paper “Retention in the Construction Industry”, published by BEIS and Pye Tait Consulting, found that 44% of the contractors surveyed had experience of retentions not being paid in the previous three years due to insolvency. In addition, 50% of contractors had their cash flow affected over the previous three years when their retentions were held, while they did not hold retention money themselves. Looking at the issue in the round, half of solvent contractors still suffer cash-flow issues because cash retentions are withheld. It should be noted that in more extreme cases, retention money is withheld for years. Why, in the face of such blatant evidence of those harmful effects, have the UK Government not taken action?

To illustrate the scale of the problem, the credit management company Creditsafe recently reported that 22 construction companies went bust in January 2020 alone. A further 158 firms were involved in varying stages of liquidation. Creditsafe predicts 4,000 construction insolvencies in 2020. That underlines the need for action.

Beyond the cash-flow issues, additional effects of withholding retentions include further insolvencies; job losses; cuts to training budgets and the inability to take on new apprentices; resources being wasted to chase up late payments, which leads to higher overheads for the company, an impact on productivity and unpaid hours for a non-chargeable activity; a possible inability for some companies to bid for other retention-based contracts or to expand because of cash-flow issues; and, if pressure bites, a desire to cut corners in other jobs to try to claw back money. Following the Grenfell tragedy, Dame Judith Hackitt’s “Building a Safer Future” report said

“Payment terms within contracts (for example, retentions) can drive poor behaviours, by putting financial strain into the supply chain. For example non-payment of invoices and consequent cash flow issues can cause subcontractors to substitute materials purely on price rather than value for money or suitability for purpose.”

There is of course a human element to this, because cash pressures bring personal stress. An industry survey before Christmas revealed that 90% of SME owners and senior managers were experiencing mental health issues, ranging from stress and anxiety to suicidal thoughts. Cash-flow issues clearly contribute to that stress.

[John Spellar]

Is there not an additional factor here? We have seen this: in any upsurge in demand, the construction industry has to go abroad for companies and skilled labour. The United Kingdom economy suffers a real loss in capacity, which impacts on private and public contracts, so the Government and in particular the Treasury should have a real interest in resolving this. Unfortunately, there does not seem to be much of a sense of urgency about solving it.

[Alan Brown]

Again, I agree with the right hon. Gentleman’s intervention, and I thank him for it. Apart from the skills issue in the UK, it is another reason why we use labour from abroad, as he said. Also, we have relied on EU labour, but now the UK Government are ending free movement, so that will cause another issue and certainly underlines why we need to resolve the matter.

If the late release of retentions is such an issue, why do the sub-contractors not do something about it, such as adjudication or arbitration? They are caught between a rock and a hard place—they need their money, but they are often frightened to rock the boat, perhaps losing a vital pipeline of work from the contractor they are in arbitration with. That was the case for a local contractor in my constituency who approached me, as the MP, on the issue of cash retentions.

The processes also cost money in terms of resource time, often valuable resource. Therefore, it is not as easy a process for sub-contractors to follow as Ministers have suggested in the past. According to the recently published Government response to a consultation, the average cost borne by firms in adjudication over the past five years is £28,000, which is cost-prohibitive for small companies.