Construction Industry: Cash Retentions

Nadhim Zahawi Excerpts

Thursday 27th February 2020 Westminster Hall

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Nadhim Zahawi)]

It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Kilmarnock and Loudoun (Alan Brown) for initiating this important debate. I also thank my hon. Friend the Member for Waveney (Peter Aldous) for his excellent contribution, and thank the right hon. Member for Warley (John Spellar) and my hon. Friend the Member for Kettering (Mr Hollobone) for their interventions.

The construction industry is vital to our future prosperity. Its turnover in 2018 was £413 billion, it accounts for 9% of the UK economy and it employs around 9% of the UK workforce, which is about 3.2 million people. The industry also builds and maintains our places of work, our schools, our hospitals, our economic infrastructure and, of course, our homes.

My hon. Friend the Member for Waveney asked me three questions. In answer to the first, which I will refer to as the Harrington question, the Government are committed to tackling the problems of late and unfair payment that burden businesses. That is why we have introduced a number of measures, including requiring large firms to report on their payment performance, the power to exclude firms that consistently pay late from Government contracts, and the prompt payment code.

Prompt and fair payment has long been a problem within the construction industry. Payment has traditionally cascaded down supply chains, as we have heard from a number of colleagues. As a result, smaller firms in the supply chain carry a disproportionate amount of project and payment risk, through late or non-payment; my hon. Friend the Member for Kettering gave Griffiths Air Conditioning and Electrical Contractors as an example of that.

Cash retention is an example of a payment practice vulnerable to both insolvency and abuse. Many construction contracts include provision for cash retention. Holding retention money is a long-established way of providing insurance against defects in an industry that is highly fragmented and operates on a project-by-project basis and in which defective work can be common. However, the practice does not offer protection to contractors against the loss of their retention due to upstream insolvency, as we have heard, including in the examples given by the right hon. Member for Warley. It can be subject to late, partial or non-payment for the supply chain. I reassure you, Mr McCabe, that Ministers acknowledge that there is a strong case to reform the practice of cash retentions, which is why we committed to review retention payments.

It may be helpful to outline the work that my Department has undertaken on this issue to date. We have consulted on the introduction of a retention deposit scheme, and produced an independent research paper on the issue, and we have looked at other solutions to the abuse of retentions. Following the consultation, we have worked with firms in the industry and with public and private sector clients to gather further information and to discuss possible solutions.

Further work has been undertaken to analyse the design, operation, costs and wider implications, including costs for the industry, of both a retention deposit scheme and a statutory ban on retentions. That work included ministerial roundtable meetings, which my hon. Friend the Member for Waveney mentioned, with key representatives from across the sector and from clients to tackle the abuse of retentions. While most people in the construction industry favour change, there is no consensus on the solution.

[John Spellar]

Quite frankly, has this issue not been researched and consulted on to death? As with most things in life, it will always be the case that there will not be unanimity. However, is it not the role of Government, and particularly that of Ministers, to make a decision, drive it through and make it happen? Without that we will keep going round in an endless cycle, while the industry, in all its various manifestations, is in a negative cycle of mutual abuse, which is dragging it down.

[Nadhim Zahawi]

The hon. Gentleman makes a powerful point. He is right that we have to make a decision, but it is complex and we do not want to create perverse incentives in a different direction. Consensus is necessary, as costs are driven by the extent to which industry adopts or resists change. If the industry does not adopt it, one sees a perverse incentive. It is clear that cash retentions in construction are a complex issue. I may be new to this job, but I spent many more years in business than I have spent being a Member of Parliament or a Minister. Sometimes the wrong decision can create a perverse incentive.

[Alan Brown]

As the right hon. Member for Warley (John Spellar) pointed out, are the Government not incentivising companies to dig their heels in and keep saying no? If the Government wait for consensus, that incentivises the wrong behaviour for contractors. As has been outlined in this debate, this situation has been going on for decades. We are not getting anywhere because the Government are waiting for a magic, 100% consensus.

[Nadhim Zahawi]

I opened by saying that the Government are committed to tackling the problem of late and unfair payments, so I hope that answers the question whether we are going to do something about the issue.

To respond to other points that were raised, the hon. Member for Kilmarnock and Loudoun and my brilliant hon. Friend the Member for Waveney both mentioned their private Members’ Bills. It is important that any action we take is robust, proportionate and evidence based, which is where we are at the moment. Several policy options are under consideration, including the retention deposit scheme. It would be premature to commit to anything at this stage while several policy options are under consideration.

[Bill Esterson]

The Minister is right to look for evidence. We have a tenancy deposit scheme that works. We have evidence from New Zealand, Canada, Australia, France and New Mexico that such a scheme is possible in construction. The evidence of best practice from around the world is in front of him. The evidence is also there from the construction industry in this country that it is desirable and needed. This has gone on for far too long; can the Government just get on with it?

[Nadhim Zahawi]

I am grateful to the hon. Gentleman for his encouragement. The hon. Member for Kilmarnock and Loudoun talked about a clear majority supporting the retention deposit scheme. I take issue with that, and not as a party political matter. There is no clear majority supporting any solution at the moment. It is right for the Government to begin to distil opinions and come to a view.

The hon. Member for Kilmarnock and Loudoun also mentioned that significant parts of the industry have called for the scheme and asked why the Government will not legislate for it. Given the evident complexity of the policy issues, as we have discussed, it would be premature to commit to introduce a retention deposit scheme. In addition, costs are driven by what the industry wants to adopt and what it wants to resist. Unfortunately, the lack of consensus to date means that a preferred solution has not yet emerged. We will continue to work with stakeholders and I would like to think that we can get to a place where we have that consensus.

[John Spellar]

Let me try to help the Minister out of this—we would even be prepared to call it the Zahawi scheme if he wants to do it. Waiting for unanimity and overall consensus is a recipe for eternal inertia. The Government have a real interest, not just from the point of view of the economy as a whole but as a client, so let me ask him the straightforward question: when is he going to come to a conclusion and decide the way forward? I am not asking for an exact date, but how about a month?

[Nadhim Zahawi]

The temptation is great, but the issue is complex, as I have said—

[John Spellar]

It is not.

[Nadhim Zahawi]

I do not agree. I hope I have built a reputation over the past decade of being someone who is evidence led; it is important that we do that. My hon. Friend the Member for Kettering talked about the inability of small firms to pursue unpaid moneys because they do not have the time or the resources. The 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 were introduced to ensure fair and prompt payment through facilitating better payment, adjudication and arbitration processes, particularly for small businesses. I wanted to put that on record as well.

[Alan Brown]

Going back to timescales, the Minister is not willing to commit to a month—forget that—but surely to goodness he could give us an idea of a programme and also explain why it took two years, following the responses to the consultation, for them to be published? That does not give confidence that there is any clear programme for the Government.

[Nadhim Zahawi]

I refer the hon. Gentleman to the answer I gave earlier. We are absolutely committed, but it is a complex issue. My hon. Friend the Member for Waveney rightly asked the Government to agree that action should be taken. It is important to remind ourselves that we have now published the summary of responses to the consultation on the practice of cash retention. We will continue to work with him, with others and with industry on these issues and on policy options to address the problem. We are committed to addressing it.

My hon. Friend’s final question was about a pilot scheme. My officials have met with representatives of Pay2escrow on several occasions to discuss the proposal for a deposit retention scheme, and the meetings have been helpful in clarifying and understanding its work. We remain in dialogue with industry to try to build consensus on the future policy. As I said, given the complexity, it is important that we make the commitment when we think it is the right thing to do. I want colleagues to understand that we are committed to that process.

[Margaret Ferrier]

In the Government consultation, 82% of respondents thought that existing measures were ineffective in addressing the challenges of prompt release and security of retentions. The Minister mentioned an independent research paper. Can he tell us how long that research paper is going to take? Is this not, frankly, a matter of kicking this issue into the long grass once again?

[Nadhim Zahawi]

I think it is unfair and wrong to say that—we are not kicking the matter into the long grass. I have repeated over and over again that we are committed to dealing with this issue.

[John Spellar]

When?

[Margaret Ferrier]

When?

[Nadhim Zahawi]

I will answer the hon. Member for Sefton Central (Bill Esterson), because he asked an important question—why will the Government not expand the remit for the Small Business Commissioner to include the construction industry? The honest truth is that the Government do not intend to extend the scope of the Small Business Commissioner’s activity to the construction industry. Section 4(5) of the Enterprise Act 2016 states that where,

“the complainant has a statutory right to refer the complaint for adjudication by a person other than a court or tribunal,”

that complaint is excluded from the commissioner’s complaint scheme.

The Government believe that that is the correct approach to considering the complexity of construction contract disputes, which tend to be incredibly technical, and we do not intend to extend the scope of the commissioner.

In answer to the question from the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier), the research was published during the consultation process. I hope that that sets her mind at rest.

[Peter Aldous]

I am grateful to my hon. Friend for looking into this issue in such detail, and I appreciate that he has been in his role for only two weeks, but can he confirm that the status quo is ruled out completely and that he will be coming forward with alternative proposals?

[Nadhim Zahawi]

I think that my stating clearly and repeating over and over again that we are committed to dealing with this issue should give my hon. Friend the comfort he seeks that we are absolutely committed to dealing with this. Part of that process, as he can see, is the publication that we have made, and we will move forward to ensure we deal with it.

I will conclude by saying that there is no simple solution to the abuse of retention. Any changes would need to be implemented correctly and require consistent support from industry. I am clear that any solution must work for the industry and its clients, must be sustainable and must address all the issues and the need for both surety and fair payment.

Industry and clients need to work together to develop that alongside Government, as they are doing, and to define what the solution might be and how we create a process that gets us to that solution. I hope that that information offers some comfort to colleagues and some reassurance that the Government are committed—I say it one more time—to addressing the problems associated with the practice of cash retention.

[Margaret Ferrier]

The Minister has been very generous in giving way. He has said again that he is committed to tackling the issue, but do we have any idea of a timescale for this, or are we going to be back here in 2022 saying, “We were in Westminster Hall debating this issue”? Could we maybe get an idea of some sort of timescale?

[Nadhim Zahawi]

The hon. Lady is right to continue to push on this issue; I agree that the process has been far slower than I would have anticipated or the Government would have liked. That is partly due to the complexity of the issue and one should not—[Interruption.] The right hon. Member for Warley may laugh, but it is complex, because we do not want to intervene and create perverse incentives, and of course a wide range of interested parties are watching this space. I promise that we will continue to work with the construction sector and its clients to achieve a solution to this problem.