Construction Contracts (England) Exclusion Order 2022

Lord Fox Excerpts

Monday 13th June 2022 Grand Committee

[Lord Berkeley (Lab)]

My Lords, I too am grateful to the Minister for his explanation—I tried to understand most of it. I too am interested in paragraph 7.3, to which the noble Baroness referred, because it comes back to the question of the best way of achieving fair competition when there is going to be a massive new project to provide better services in the water sector. One has to look perhaps at the example of the Thames Tideway tunnel—that probably comes under the category of being large. Whether it will deliver what Thames Water thinks that it will at a price that customers can afford remains to be seen. I do not quite see why these two large projects should be dealt with separately. Could the Minister name them and give us some idea of what they are about and what the risks might be? I will not go into them now, because they could be anything.

The regulator is apparently in charge of all of this and will vet contracts that it seems to me will be to design, construct and operate—why can these not be done by competitive tendering, with the usual construction industry fallbacks if things go wrong? It would be interesting if the Minister could give us more information about not only the two big ones but the 18 strategic water resources ones. How will anyone be able to tell or believe—we hope that we will be able to believe—that the regulator has delivered for the customer as well as for shareholders?

[Lord Fox (LD)]

As the Minister knows, I am no lawyer—perhaps I should have taken a law degree before attempting this statutory instrument. I note that it is not just the European Union that can amass red tape; we seem to be doing it very well on our own, so I am not sure it can refer us to the WTO for competition.

This is a very complex model. I was caught by the idea that we appear to have been progressing without it for a while. In a sense, is this closing a loophole that has been spotted, or does this reflect a trend in how the market is going about delivering these projects? What drove the decision to table this statutory instrument now? In other words, what has caused this to happen now when it clearly could have happened some time before or in future?

In passing, the Minister mentioned benefits to consumers. I think he outlined that there would be some sort of competitive tendering process, and therefore the price of a particular project would go down in cost. I am interested in the very sharp end of the consumer experience—the connection and that kind of thing. I assume that this applies to that as well as to the larger projects. If it does not, how will a new consumer attempting to join the system experience it? As I understand it, at the moment they are given a “take it or leave it” price by the water supplier. Does that continue to be the case? Will there be an opportunity for consumers to drive down the cost to them of an individual connection or is this focusing only on much larger projects?

The other point is how this flows through the supply chain. The Minister mentioned that the tier 1 contractors are potentially liable to be most affected. However, this marks a change right down through the chain to tiers 2, 3 and others. I would be interested to know how low down their tier structure the department intends to bring suppliers up to speed on how they address their role in this change in the supply chain. Other than that, I think I welcome this and certainly look forward to the Minister’s answers.

[Lord McNicol of West Kilbride (Lab)]

My Lords, I again thank the Minister for his introduction to another very technical SI. Until his introduction, the only real question I had was around the consultation. He touched on it at the end of his introduction, but I could not find any of the details of the responses to it online. That is probably me, but could he say a little more about the feedback received as part of the consultation?

Following on from the themes of the general public and who will benefit from this SI, the Minister said there were some concerns and worries from the first-tier subcontractors. I think we all agree that the removal of “pay when paid” was good. I worry a little, if we are bringing back special circumstances which in reality are “pay when paid”—although under slightly different processes in terms of certificates and completions—whether we are opening it up. Is the Minister worried about this at all or is the SI tight enough to prevent “pay when paid” returning to the construction sector?

The final point has been touched on by the noble Lords, Lord Berkeley and Lord Fox, and is about fair competition and the general public. Does the Minister believe there will be any increase in price or unitary charge for the general public in this SI? With that, I will leave my questions.

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[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.

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[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—