Draft Construction Contracts (England) Exclusion Order 2022

Meg Hillier Excerpts

Wednesday 29th June 2022 General Committees

[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.

[Dame Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

Before the Minister finishes, I note that it falls to Ofwat to monitor this legislation. Obviously, the very long-term timescales of some of the projects will be such that they may outlast our time as Members of this House. How is he going to make sure that Ofwat’s monitoring feeds back into Government if there is a problem in the future? If there is a problem, that could be significant. On the other hand, if the model works well, it could be used for other infrastructure projects.

[Lee Rowley]

I am grateful for that question. I had a long discussion with Ofwat yesterday about the importance of its monitoring role. The first stage is to make sure that this works. Obviously, given that we have not yet changed the rules—this order has not gone through yet—we do not have a clearly working example in progress. I am very open about that. There will be a number of pathfinder projects, and they will have to be reviewed. Ofwat has been clear that it will review and, if necessary, suggest changes. It would be entirely appropriate for the relevant Committees and Ministers to remain close to that process over the months and years ahead. The fact that two parties are interested, as well a third in one of the other three nations, should give us clarity about what we hope will happen in the coming years—namely, that this will be a successful model that will balance the kinds of things that we have spoken about.

From the perspective of the Department for Business, Energy and Industrial Strategy, I accept that this will need to be monitored closely. I encourage all the relevant Committees in the House of Commons to do that. We want this to work. We want to learn from the challenges and make sure that it does not fall into the problems that have resulted from other types of financing structures, with which I am familiar from my time serving on the Public Accounts Committee, chaired by the hon. Member for Hackney South and Shoreditch. We hope that that will not be the case in the future.