CBI on

industrial strategy
Building Britains future
An industrial strategy
for construction
The CBIs submission to the
construction industrial strategy
An industrial strategy for construction developed
by the sector and government has the potential
to unleash growth in the industry and drive
transformation. It will help secure the business
environment that enables construction to thrive
by creating long-term operational certainty.
The CBIs 2012 report Playing our strongest hand Maximising
the UKs industrial opportunities set out the case for developing
industrial strategies in key growth sectors to rebalance the
economy towards investment and trade. The construction sector
is a key economic enabler creating and maintaining our built
environment. The sector has strong potential for growth because
of its job-creation capacity, extensive value chain and latent
capacity as a result of the recession.
As part of a suite of industrial strategies, the government will
launch the construction industrial strategy in summer 2013.
This should be the start of an evolving process of industry and
government working in partnership to deliver the strategy.
This paper sets out the CBIs views on an industrial strategy
for construction and is based on extensive discussions with
the construction sector and the wider business community.
In the future the construction sector will be an enabler of
other industries, providing services that exceed expectations
by leveraging world-leading expertise. A strong domestic
manufacturing sector will be at the heart of an innovative
and responsive sector.
A shared vision for the future of the sector will need to be at
the centre of a successful industrial strategy for construction.
A strategy that delivers bold targeted action will ensure:
The construction sector is at the heart of the UKs
economic growth
Construction is an economic engine that meets and
stokes demand from key sectors
By harnessing sources of competitive advantage,
construction will be a world-leading industry by 2025.
Establishing a shared vision for construction in 2025
The construction sector is a key job creator and contributor to the
UK economy, employing over 2 million people.
1
It is a diverse
sector ranging from international companies to thousands of small
businesses offering services such as contracting, house building,
consultancy and professional services, and includes manufacturers
of construction products. The supply chain alone was worth
124.6bn in 2010.
2
Overall, construction accounted for 6.7% of GDP
in 2012.
3
But the effects of construction
activity are felt more widely than this figure
suggests spending on construction
creates growth in the wider economy with
every 1 spent on construction generating
2.84 of spending more widely.
4
The sector will take time to recover from
the recession
The construction sector is a bellwether for the economy in the
UK and has been significantly affected by the recession due to
the resulting decline in demand from both the public and
private sectors. Construction output in 2012 was nearly 15%
below its pre-crisis peak in 2007.
During this period construction sector output fell most strongly
in private industrial activity (down 44.7%), private housing (down
34.5%) and private commercial activity (down 31.0%). Repair
and maintenance activity also fell by 9.6%. The only elements
of activity which saw growth over the same time period were
infrastructure (up 51.2%), public housing (up 19.3%), and other
public construction activity (up 19.3%).
5
The categories of
construction which saw the biggest decline represented over
half of construction sector output in 2012 as shown in Exhibit 1.
Exhibit : Construction sector output in by sub-category
Source: Office National Statistics (ONS), Cebr Analysis
Repair and
maintenance
.%
Private commercial
.%
Private industrial
.%
Public (excluding
infrastructure and
housing) .%
Infrastructure
.%
Private housing
.%
Public housing
.%
The UK construction sector is at the heart of economic growth
To support our submission the CBI commissioned independent
research on the future of the construction sector from the Centre
of Economic & Business Research (CEBR). Whilst confidence
is returning to some parts of the construction sector, CEBR
forecasting suggests that increases in construction output will be
slow for much of the next decade without targeted interventions.
Indeed, Exhibit 2 indicates that growth in the construction
industry may reflect modest but steady improvements in the
economy over the coming years, averaging 1.3% between 2014
and 2017. However, the data also shows that construction output
may not surpass 2007 levels until 2023 and construction sector
employment may not rise above 2007 levels until 2024 (2.3m).
The CEBRs analysis is broadly comparable with other forecasts.
The Construction Products Association (CPA) has forecast that
the pre-crisis peak will not be reached until 2021, while the
Construction Skills Network does not expect the peak to be
reached until 2022.
6
However, any forecasting, particularly on
a long timescale, is only indicative in nature.
Source: ONS, Cebr Analysis
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Lxhbl 2: Annual growth & forecasts in construction output, %
but will be well placed to deliver growth
Construction companies are more optimistic about the future
of the sector given the current level of interest from government.
Business leaders in the sector have been unanimous in their view
that there is far greater potential for growth and job creation with
targeted action and commitment from government to build and
renew our national infrastructure. Construction historically
rebounds strongly after a downturn as Exhibit 3 shows.
Lxhbl 3: Comparisons of GVA (UK) and construction output (GB), %
Source: ONS, CBI analysis
6vA Ccnslruclcn wcrk
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1
In addition, the CEBR analysis indicates we are starting from
a strong base. Exhibit 4 looks at international comparisons for
construction output and GDP. Compared with the US and the
Eurozone as a whole, construction makes up a larger share of
GDP in the UK. Although construction output fell sharply in the
UK between 2007 and 2012, the decline in output seen was
smaller than in the US and the Eurozone.
Lxhbl /: Change in construction output and GDP - , %
-35 -30 -25 -20 -15 -10 -5 0 5 10
Laslcrn and Ccnlra Lurcpc
6crmany
Francc
unlcd Kngdcm
unlcd Slalcs
Lurczcnc
llay
Span
Source: ONS, Eurostat, US Bureau of Economic Analysis, Cebr analysis
%changc nccnslruclcnculpul 2007-2012 %changc n lcla 60P 2007-2012
and rapidly increase the level of overseas trade
UK construction companies have a strong global reputation with
major international engineering, architecture and consultancy
companies topping the rankings of world league tables. Indeed,
the value of construction services exports has seen rapid growth
in recent years; between 2001 and 2011 the value of construction
exports rose from 0.2 billion to 1.7 billion.
The CEBR analysis suggests overseas trade will continue to be an
important area of growth for the sector but we need to maintain
our competitive edge. The Olympics helped to show the world our
construction sector at its best and created a strong platform to
increase exports in construction services. Exhibit 5 shows that
CEBR forecasts suggest that export activity in construction
services could increase to 4.4 billion by 2025.
Lxhbl 5: Construction sector UK exports and forecasts of
construction services, billions
Source: ONS, Cebr Analysis
0.0
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1.0
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5
Opportunities for domestic and international growth are likely
to create even greater segmentation and fragmentation in the
industry over the coming years. By 2025 it is likely that small and
medium sized domestic companies will be operating alongside
a more limited number of international companies.
The UK will need to maintain its competitive edge in key growth
areas. For example, the UK is now recognised as a global leader
in the exploitation of Building Information Management (BIM)
technology and processes. But other countries are not far behind
and we will need to continue to evolve in the adaption of BIM.
Construction is an economic engine
that meets and stokes demand from
key industrial sectors and markets at
home and overseas. Demand in the next
decade shows how the sector is a critical
economic enabler as the UK responds
to global trends.
Global trends will shape the business environment
in 2025
The 2011 CBI report A Vision for Rebalancing the Economy
identified five key mega-trends that will shape the overall
business environment in the next decade. These mega-trends
will create opportunities for growth in construction:
The need for new and better infrastructure we will need
310bn investment to deliver the 2012 National Infrastructure
Plan, with about two-thirds needing to come from the private
sector. Construction will be at the heart of updating our
creaking infrastructure.
Growth in emerging markets there will be an increase in
export opportunities, especially from new free trade agreements.
Construction businesses will export skills, knowledge and
products to emerging markets over the next decade.
Digital expansion transforming businesses and creating
national and international opportunities in mobile and digital
markets. Construction is already being transformed by the use
of technology such as BIM and this will be a key growth area.
Demographic change continuing growth in urban populations
will create demands on the built environment and an ageing
society will drive changing patterns of consumption. The number
of people over 65 will increase by 38% by 2025. This will add
further pressure on demand for new homes, particularly for
attractive retirement housing. Our cities will need to invest in
infrastructure and services to respond to rising populations.
Energy and climate change 55bn investment in renewable
energy alone is needed over the next 10 years and the need
for a reduction in emissions is leading to increased focus on
energy efficiency in new and existing property. Construction
firms will be required to deliver this greater focus on energy-
efficient buildings.
Construction is an economic enabler for business
6.
7
Construction accounted
for 6.7% of GDP in 2012.
Energy
The UK needs to build 110bn worth of new
power stations and generator facilities in the
coming decade in order to ensure we keep the
lights on and meet our carbon emission
targets. 9-150 tonnes of cement and 25-150
tonnes of steel are needed for each megawatt
of gas power, nuclear or offshore wind.
Increasing investment in renewable energy
sources will need the expertise and innovation
of the construction sector.
Water
The water industry will see rising demand from
industry and households and will need to
manage the impact of climate change and
water security. The sector will spend around
65bn by 2025 in upkeep and maintenance
of facilities infrastructure and reservoirs.
Housing
There will be increasing demands for new
homes from rising numbers of new households
with the biggest rises in demand coming from
single and older households. We are currently
building less than half the homes we need
and this is set to continue with around 221,000
new households per year in England. Consumer
demand for energy efficient and technologically
smart homes will be standard by 2025. House
builders are likely to build between 1.7-2.5m
new homes by 2025.
Transport
Investment in our rail network will exceed
9.5bn by 2025. Major investment in our road
network will be needed as the UK economy is
already losing up to 8 billion each year from
congestion on the roads, which could
potentially rise to 22 billion by 2025. There
is currently a 10bn shortfall in funding for
highways projects. The key priorities for
clients in this sector are reducing their carbon
footprint and on-going innovation in design.
Digital infrastructure
The UK is a world leader in digital infrastructure
and we will need large-scale investment by
2025 to maintain this competitive advantage.
Key demands over the next decade will come
from the roll out of 4G, upgrade to 5G and
on-going investment in broadband.
Commercial property
Increasing business confidence will lead to
increasing demand in the commercial property
sector by 2025. However, spending will show
weak growth in the next few years with high
vacancy rates at present. Whilst overall
demand will be modest in the short term,
the market is more segmented in reality with
strong demand in some areas. Trends in the
sector of creative urban-led design, innovation
in building management design and
sustainability will increase in prominence. As
we shift to a new normal for financing as a
result of structural changes in banking we will
also need to find new models to fund work on
some existing properties.
ConsTruCTion
inDusTry in
2025
HousinG
TransPorT
EnErGy
CommErCial
ProPErTy
DiGiTal
infrasTruCTurE
WaTEr
and construction will ensure the uK responds
Construction provides world-class services enabling other businesses to
boom. The construction industry exists to meet the needs of clients and
the clients role from procurement to delivery is critical to the success of
a project. To inform our response to the development of an industrial
strategy for construction we mapped demand for construction activities
from key sectors and conducted a number of interviews to look at the
changing demands from clients.
The chart on the previous page summarises our findings about demand
from key sectors who will be investing over 300bn by 2025 in the built
environment. Across these entire sectors repair, maintenance and
improvement (RMI) spend will increase. Investing in the built environment
is a substantial and sometimes risky investment for any business.
Construction companies will need to gear up to this, maintain an increased
focused on low carbon design and be able to respond to the changing
business requirements of key sectors. Embedding innovation in our
approach to construction will be central to meeting the needs of key clients.
Through our in-depth interviews we found that the sector has a strong
reputation among clients. Key strengths that came out of our discussions
include meeting the needs of clients, responding to demand and a greater
focus on innovation and efficiency as a result of the recession.
When asked about the future, clients said they would like to see:
a planning system that works for businesses (see box opposite)
greater collaboration across the industry, government agencies
and the supply chain
on-going improvements in innovation and efficiency
low carbon design and sustainability at the heart of how the
sector works and responds to the demands of clients
the UK being able to beat the increase in competition from
overseas companies where expertise in areas such as high-end
design and delivery is getting better.
Many of these areas have been the subject of extensive focus in the
construction industry. The 1994 Latham report focused on the key role
of the client and the importance of collaboration across a fragmented
supply chain through focusing on procurement reform.
8
In 1998 Egan
sought to further drive efficiency improvements through committed
leadership, customer focus, cost and quality, integrated processes,
and commitment to people.
9

A decade later progress on these areas has been substantial but is
still ongoing. In particular the industry is still characterised by a diverse
and fragmented supply chain which acts as a barrier to delivering
improvements through collaboration and efficiency. Only an industrial
strategy for construction, focused on delivering carefully targeted action
in key areas of competitive advantage has the potential to deliver long
term reform.
Planning for the future
Whilst the planning system is not included in the scope of the
construction industrial strategy both construction firms and clients
agree that an effective planning system will be central to economic
growth in the UK. Too often essential shovel ready projects are
being delayed by planning red tape at a cost to the private sector.
When implemented poorly, our planning system increases office
rent, lowers retail productivity and lowers employment in small
independent retailers and this needs to change.
7
Whilst recent
reforms to the planning system have been welcomed, we need a
decrease in time taken for planning permission and reduction in
costs to businesses in getting planning permission.
By harnessing sources of competitive advantage,
construction will be a world-leading industry by
2025. But industry and government will need to
collaborate and show leadership to secure a strong
future. Our proposed KPIs will ensure that the
industrial strategy enables the sector to exploit
sources of competitive advantage.
sources of competitive advantage to tilt the
playing field
UK construction businesses are at the forefront of sustainable
design and innovative technologies such as BIM, and as already
mentioned are increasingly exporting this expertise overseas.
Underpinning this we need to go further to secure a strong
domestic manufacturing sector.
A successful industrial strategy for construction will therefore
need to focus on developing key areas of competitive advantage
in the sector to meet the demands and expectations of clients in
2025. In doing this we can learn from other sector strategies such
as automotive and aerospace, where each has focused on a
limited number of areas that will make the most difference to the
development of the sector. For this reason we think an effective
industrial strategy for the construction sector should focus on
four specific areas as set out below.
In addition, an effective strategy must establish measurements
for success in these areas, so we have set out some KPIs below.
It is important to note that the KPIs will need to be kept relevant
and under review and our proposals are based on available
sources of information for benchmarking.
Securing a world-leading sector
Become a world leader in sustainability and
low carbon construction, for example in the
delivery and lifetime performance of buildings
and infrastructure. The sector will help secure
a low carbon built environment through
contributing to a 50% reduction on carbon
emissions by 2025. Certainty through building
regulations and incentivising energy efficiency
in new and existing buildings will have a key
role to play in achieving this.
Embedding innovation in the way firms work
and embracing new technologies. Whilst strong
progress has been made industry fragmentation
and a project-centric approach continue to
restrict innovation in construction. This should
be measured through a 20% increase in
spending on R&D by 2025.
10
Government and
the sector should also conduct a feasibility
study into the potential of an innovation levy
to transform the sectors approach to innovation.
Finally an intelligent and responsible use of
public procurement to create wider economic
value can help to drive forward innovation.
Creating a strong and resilient supply chain that
utilises the strength of UK manufacturers. It is
estimated that products and services secured
from the construction supply chain typically
account for about 80% of the cost of the project.
Through stronger integration and a robust
domestic supply chain we can achieve greater
efficiencies and growth. This could be achieved,
as well as addressing the balance of the trade,
by sourcing 85% of building products and
materials used on UK sites by 2020 (by value).
This is currently around 75%.
Ensuring that world-class expertise is nurtured,
articulated and exported. UK construction
companies have the potential to greatly increase
levels of overseas trade in areas of key strengths
such as engineering, architecture and low
carbon construction. Progress should be
monitored through year on year growth targets
with a goal of tripling the level of UK exports of
construction services by 2025. The sector and
government will need to undertake further
research to be clear on exact areas of expertise
to nurture.
and an operational environment that enables the
sector to thrive
Underlying a successful strategy there is a need for an operational environment
which helps secure private sector growth. Most of all the sector needs to be
supported by long-term certainty in regulation creating the environment to give
businesses the confidence needed to invest in innovation.
There are also some embedded structural issues in the sector and operational
environment which will need to be addressed to create the environment for the
sector to thrive, such as skills, access to finance and the image of the sector.
The UK is facing a skills gap and this is a concern coming out of other sector
industrial strategies. The CBIs 2012 survey found that 61% of firms say school
and college leavers have not developed the self-management skills they need
for work while at school and are not confident of meeting their need for higher-
skilled employees. This is why in our First Steps report, the CBI has called for
an overhaul of the school system to deliver for the country as a whole.
In construction, there are already acute skills shortages and this is set to
worsen, increasing costs and undermining sector transformation. A recent
Charted Institute of Building survey of construction managers found 82%
believe a skill shortage exists in the sector. The most pressing skills gap is
in trade and technical skills (particularly in plumbing, electrical and gas
specialisms), followed by leadership and construction management skills
and off-site manufacturing (specifically in precision construction).
11
The sector
will need to develop a self-sustaining skills offer to address the skills gap.
Access to finance is also a concern, especially for SMEs. SMEs are key to
growth in the construction industry, particularly with their strength in RMI
which will be key to delivering carbon reduction. But with constrained
lending many commercially viable construction companies report that they
are not able to access finance at competitive rates. A recent survey from the
Federation of Master Builders found that over 40% of construction SMEs in
the last two years found it harder to access credit facilities and that credit
was more expensive. The CBIs 2012 report Financing for Growth called for
a one-stop-shop for business finance initiatives ensuring that businesses
with viable lending propositions do not slip through the net.
Finally, the industry and government will need to work on building a positive
image of the industry to build a stronger reputation amongst consumers and
to become a career of choice.
With this in mind we suggest the industrial strategy for construction should focus on the following areas and
measure success using these KPIs:
References
1 House of Commons Construction Industry
Economic Policy & Statistics Briefing Paper,
August 2012
2 CEBR, The Future of UK Construction
A report for the Confederation of British
Industry, April 2013
3 ONS, Blue Book, 2012
4 LEK Consulting, Construction in the UK
Economy, 2010
5 CEBR, The Future of UK Construction
A report for the Confederation of British
Industry, April 2013
6 Construction Products Association,
Construction Industry Forecasts Winter
2012/13 edition
6 Construction Skills Network, Blueprint
for Construction 2013-2017.
7 Cheshire et al, Links Between Planning and
Economic Performance: Evidence Note For
LSE Growth Commission LSE, 2012
8 Sir Michael Latham, Constructing the Team,
July 1994
9 Sir John Egan, Rethinking Construction,
November 1998
10 Spend on R&D is a limited measure of
innovation but data is readily available.
11 Charted Institute of Building, A report
exploring skills in the UK Construction
Industry, April 2013
For further information, contact:
Lucy Thornycroft
Head of Construction and Manufacturing, CBI
Centre Point, 103 New Oxford Street
London WC1A 1DU
T: +44 (0)20 7395 8060
E: lucy.thornycroft@cbi.org.uk
Chris Cassley
Policy Adviser, CBI
Centre Point, 103 New Oxford Street
London WC1A 1DU
T: +44 (0)20 7395 8191
E: chris.cassley@cbi.org.uk
www.cbi.org.uk
Product code: 10017
June 2013
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