A Study of the Factors Underpinning Investment in the Construction Products Industry

Construction 2025 Industrial Strategy

2

November 2014

An industry that drives and sustains growth across the entire

economy by designing, manufacturing, building and maintaining

assets which deliver genuine whole life value for customers in

expanding markets both at home and abroad

Construction 2025: Industrial Strategy for Construction

3

Executive Summary

In the last 25 years the pace of globalisation has accelerated at an unprecedented rate and is reshaping the international economic landscape. In the construction products industry, many companies trade on a multi-national scale and, as a result, have a choice of where they base their manufacturing. One of the major challenges faced today by both the UK government and UK business leaders is ensuring that this country is viewed as a favourable location to invest.

This study is the second in a series of projects that the Construction Products Association is contributing to support Construction 2025: Industrial Strategy for Construction1. Building on the work of the first study, which looked at the ability of UK construction product manufacturing to meet the forecast demand, the Association has sought to understand the economic, political and regulatory landscape facing the industry. The results in this report suggest how industry and government can work better together to develop policies that give greater certainty and confidence to industry to encourage investment, innovation and growth.

The key findings include:

• Effective regulations are clearly defined, target-driven and not prescriptive.

• Industry needs policy and regulation that is simple with minimal administrative burden.

• Policy works best when government consults industry early and regularly to identify problems, review measures, provide solutions and evaluate results.

• Government can create greater certainty for industry by providing a roadmap with a long term plan – not just over five-year parliamentary cycles – and clear goals which allow time for industry to prepare.

• Once the roadmap is implemented, unplanned changes should be avoided. Delivery according to the original plan is key. Consistency of policy helps industry to invest.

• Cross-party consensus should be sought in advance for policies which are key drivers in major markets (e.g., infrastructure and housing), to prevent changes occurring due to party politics.

Industry also needs to demonstrate leadership and play its part in helping develop effective policy and regulation. We can do this by working together to establish a consensus and:

• Speaking as a supply chain with a consistent voice to government.

• Providing government with high-level, outcome-focussed, strategic input which avoids commercial differences.

• Supporting well-considered, effective regulations with credible, practical solutions that are fact and evidence-based.

1. https://www.gov.uk/government/publications/construction-2025-strategy

2. A Long-Term Projection of Construction Output and Analysis of the Current Level of Capacity Utilisation for Construction Product Manufacturing, found at: http://www.constructionproducts.org.uk

4

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ly O

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t (£

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201

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30,000

20,000

Introduction

In July 2013, Construction 2025: Industrial Strategy for Construction was jointly published by government and industry. This set out how the UK can place itself at the forefront of global construction.

The Construction Products Association was asked to help develop and deliver the Strategy, as it represents a large sector of the UK supply chain. Construction product manufacturing and distribution account for more than 1/3 of total construction output, with a combined turnover of over £40 billion per year. Altogether, this industry accounts for 10% of UK manufacturing and directly provides 300,000 jobs across 20,000 companies.

The first project carried out by the Association in support of the Strategy sought to understand the current UK construction manufacturing capacity, to forecast demand and map the manufacturing industry’s ability to grow and meet that demand. The key findings of that April 2014 study2 include: the construction industry is expected to undergo a period of strong growth over the next decade; the industry would benefit from greater investment in order to improve both capacity and productivity; and, if imports rise in the long-term the government’s ambition to reduce the trade deficit on construction products and materials by 50% would be difficult to achieve.

(As part of the April 2014 study of capacity and capability gap analysis, the Association developed an econometric model showing the historic data on construction output and the projection with upper and lower bounds. In 2013 construction output totalled £112.3 billion. The central projection indicates that output in 2025 will total £139.6 billion. With the upper and lower bounds, however, this total could be as low as £131.4 billion, or as high as £147.7 billion.)

Actual OutputEstimated OutputUpper and Lower Estimate

1997

2000

2002

2005

2008

2011

2013

2016

2019

2022

2024

2025 Construction Output Projections

5

This is a summary report. The full paper is available at www.constructionproducts.org.uk.

This second project now addresses a recognition within the Strategy that “uncertainty about the impact and timing of regulation is (also) a factor which can increase business risk and hence can inhibit investment, innovation and resources.” This study therefore seeks to:

• Identify the main factors that influence business investment in the UK.

• Understand the economic, political and regulatory risks.

• Showcase examples where changes in regulation and policy have created confidence in the sector, encouraged innovation and delivered results in line with the policy objective. Also, in contrast, highlight where uncertainty in regulation and policy has had a negative impact on the construction products industry.

• Advise on a best practice approach to regulation and policy that can be taken by government to decrease business risk and instead promote investment.

uncertainty about the impact and timing of regulation is (also) a factor which can increase business risk and hence can inhibit both investment and innovation and resources

The paper contains six parts:

Economic Context Contains an analysis of key economic factors for the UK.

Political Risk Looks at the political risk stemming from the electoral cycles.

Policy and Regulatory Risk

Investigates policy and regulatory risk by mapping the numerous existing policies and regulations currently impacting the construction products industry. It also includes results from a set of surveys conducted by the Construction Products Association on its member companies and the wider industry about the impacts, both positive and negative, of six government policies.

Energy Risk Addresses concerns emerging from the energy markets relating to prices, supply and security.

Case StudiesIncludes case studies relating to the six policies described in part three. This section (appended) demonstrates both successful and unsuccessful examples of policy and regulatory change.

The Way ForwardBrings together the results, identifies key lessons from past policies and makes recommendations for a process to overcome issues around political and regulatory risk pertaining to investment and provide guidance for future policy and regulation.

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Economic Context

In addition to specific policies and regulations relevant to the construction and manufacturing industries, a number of general economic factors help determine whether the UK is deemed an attractive place to do business, including:

Finance

• Monetary Policy: the degree to which the central bank acts with autonomy should be positively correlated with increased levels of investment. The Bank of England is independent.

• Credit Ratings: based upon the credit rating of the UK by the three major agencies, the general risk of investing in the UK is perceived to be low.

• Companies based here enjoy the ability to operate within the UK financial system with the accompanying enhanced levels of access to finance.

Corporate Tax Rates

• The UK has low tax rates relative to its competitors.

• Increased corporate tax rates, and higher rates compared to competitor countries, are likely to be negatively related to business investment.

Capital Investment - fiscal policy

• The provision of adequate infrastructure helps ensure that companies can conduct business without hindrances; this positively correlates with business investment.

• While the UK is ranked as 28th in the world for the quality of its infrastructure, the government currently has £384 billion of announced infrastructure work.

Business Investment £m FTSE

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

140000

130000

120000

110000

100000

90000

80000

7500

7000

6500

6000

5500

5000

4500

Busi

ness

inve

stm

ent

Stoc

k m

arke

t

Business Investment and Stock Market Index

UK Credit Rating

AA+ Stable

AAA Stable

Aa1 Stable

7

OECD Regulatory

Restrictiveness Survey 2013

Labour Force

• For businesses in the manufacturing sector, investing in operations abroad shifts part or all of the production process to the host country’s labour force. For this reason, the flexibility of the labour market is a key consideration for companies when determining where to invest.

• According to the World Economic Forum the UK has the fifth most efficient labour market in the world, based on factors including flexibility of wage determination, hiring and firing practices, redundancy costs and ability to attract and retain a talented workforce.

Openness

• If there are exchange controls, currency regulations or limitations on foreign ownership, overseas investors will struggle to access the market in a potential host country. Openness relating to foreign direct investment is therefore positively correlated to levels of investment.

• The UK benefits from being part of the EU and on an internationally comparative basis being relatively more open, or indeed at least as open, as its major competitors such as France and Germany.

Exchange Rates

• From a theoretical basis, both the level and volatility of exchange rates are most likely to impact investment decisions of UK and overseas headquartered companies via their effect on the profitability of trade. The UK has stable exchange rates that are positively related to investment.

MeasureRank G7 Rank

UK US Canada Germany France Japan Italy

Country capacity to attract talent

4 6 9 20 44 80 126

Labour market efficiency 5 4 7 41 71 23 137

Flexibility of wage determination

12 29 30 141 75 11 142

Country capacity to retain talent

13 4 19 9 57 29 117

Redundancy costs 26 1 39 100 54 9 19

Hiring and firing practices 27 9 16 118 144 134 143

Source: World Economic Forum Global Competitiveness Report 2013–2014

Euro (left scale)

US Dollar (left scale)

Chinese Yuan (right scale)

2006

2007

2008

2009

2010

2011

2012

2013

2.2

2

1.8

1.6

1.4

1.2

1

16

14

12

10

8

6

4

2

0

Exchange Rate Comparison

WORLD BANKWORLD BANK

8th8W

ORLD BANK

EA

SE OF DOING BUSIN

ESS

2015

Full Foreign Ownership 100%

UK Light Manufacturing 65%

UK Transport 80%

World Bank Investing Across Borders Survey

8

Political Risk

General Elections and Business Investment

The United Kingdom’s standing as an established and respected democracy supports its ability to attract and retain investment. The clear separation of powers between the executive, legislature and judiciary offer accountability, scrutiny and stability to the business community.

Economic theory would suggest that in the presence of uncertainty business investment will decline or remain flat. For this reason, it could be proposed that companies tend to become more cautious around elections and delay investment in anticipation of changes in the country’s macroeconomic policy, taxation, monetary policy or the general regulatory environment.

An essential element of the UK political system is regular elections. Owing to the introduction of The Fixed-term Parliaments Act 2011, UK General Election dates are clearly defined. With the potential for political change, however, comes the perceived potential for uncertainty and risk, particularly in regards to policies deemed relevant to business.

To test this we have looked at economic activity growth (Gross Domestic Product, “GDP”) and plant and machinery investment growth (Growth Fixed Capital Formation, “GFCF”) data over the past five UK general election cycles. This should infer any potential correlation between business investment and general elections, as an increase in capital spending is typically consistent with a growing economy and vice versa. A disparity in this scenario could imply that political uncertainty has played a role in the investment decision.

The analysis (right) covers five elections cycles (1992, 1997, 2001, 2005, and 2010). For 1992, 1997 and 2010 the suggestion that political uncertainty surrounding an election leads to a decrease in investment does not stand. In fact, for all three of these election periods GDP and GFCF plant and machinery growth equated.

Conversely for 2001 and 2005, disparity is shown between the two measures, suggesting that political uncertainty around the election period may have affected business investment. In these cases, however, other non-related factors may have influenced this drop in business investment, including the dot-com crash in 2000/01 and the after-effects of 9/11.

Investment may also be affected if the outcome of the election is highly uncertain. However, in 1997 when New Labour came to office and 2010 when the Coalition Government took office both election cycles did not see a discrepancy between GDP growth and business investment.

March 2014

May 2015

UK Budget 19 March 2014

Purdah (pre-election

period)26 March 2015

General Election7 May 2015

European Commission

Nominates Next Commission

President 26-27 June 2014

Labour Party Conference (Manchester) 21-24 September

2014

Liberal Democrats

Party Conference (Glasgow)

4 -8 October 2014

Autumn Statement

3 December 2014

European Election

22 May 2014

Dissolution of Parliament30 March 2015

Scottish Independence Referendum

18 September 2014

Conservative Party

Conference (Birmingham)

28 Sept - 1 Oct 2014

Confirmation of New

Commission October 2014

UK Budget March 2015 TBC

9

data does not show any relationship between the UK electoral cycle and UK business investment

Conclusion: Political RiskNo statistical relationship can be found from this data, and therefore there is a strong possibility that any disparity between GDP growth and the GFCF plant and machinery growth around election cycles may have occurred by chance. Therefore, it can be suggested that the data do not show any relationship between the UK electoral cycle and UK business investment.

We note that this study focusses on general election cycles and not referendums. The changing political landscape following the recent Scottish referendum, could impact on future business investment. UK Parliament is currently debating the future of the devolution of powers, the outcome of which will have a significant impact on construction product manufacturing and distribution, particularly in regards to harmonised regulations. UK manufacturing companies may delay future investment until these new powers are clearly defined.

Similarly, there is expected to be a considerable debate in advance of any referendum to decide the UK’s future in the European Union, and the business community may well suspend major investment until the uncertainty around that decision is cleared.

GFCF Plant and Machinery Growth GDP Growth

1987

1988

1989

1990

1991

1993

1994

1995

1996

1998

1999

2000

2002

2003

2004

2005

2006

2007

2008

2009

2011

2012

25%

20%

15%

10%

5%

0

-5%

-10%

-15%

-20%

-25%

-30%

8%

6%

4%

2%

0

-2%

-4%

-6%

GFC

F A

nnua

l Cha

nge

%

GD

P A

nnua

l Cha

nge

%

1992

1997

2001

2005

2010

Business Investment v General Elections

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Policy and Regulatory Risk

An array of policies and regulations will have an impact upon the construction industry to 2025 and beyond. These can generally be categorised either as market drivers (those influencing market opportunities; e.g., Construction 2025 Industrial Strategy, Help to Buy) or compliance obligations (those directly affecting manufacturers as a necessary cost of doing business; e.g., Landfill Tax, the Energy Act, the EU Emissions Trading Scheme).

In order to better understand the breadth and depth of responsibilities facing the industry, the Association identified 132 current and pending UK and EU policies and regulations3 and mapped these according to classification and region:

Policy and Regulatory Risk Survey

In order to identify the extent to which political and regulatory risk affects businesses investment decisions, the Association surveyed its members5 and the wider industry about policy and regulation in general, but also on a selection of specific examples:

Part L (conservation of fuel and power) of the Building Regulations for New Dwellings, the National Infrastructure Plan, the Help to Buy scheme, the Energy Company Obligation, Green Deal and the EU Emissions Trading System (EU ETS). These examples were chosen as a representative cross section of the different types of policy, regulation and

3. Policies and regulations regarding transport, health and safety, human resources, finance and banking have not been included, nor installer skills (which is covered in another Construction 2025 strategy project). Voluntary standards have also been excluded. 4. The complete map, with descriptions, key dates and links, can be viewed as an appendix to the full report, available at www.constructionproducts.org.uk5. Survey conducted June through August 2014. Responses were received from 72 manufacturers of construction products and representatives from their supply chains, from the full spectrum of sub-sectors. The full survey results can be found at www.constructionproducts.org.uk

government schemes and sectors known to have had a significant impact upon the construction industry and market.

The survey has proved useful in terms of identifying the factors which define good and bad policy. The intention was not to conduct a specific enquiry into each of the six policies chosen. Questions were meant to draw straightforward, inferable conclusions based on whether the general impact was positive or negative and subsequently, the reasons why.

ClassificationNumber of

Market DriversNumber of Compliance

ObligationsBuildings 24 2Economic 8 0Energy and Carbon 21 23Environment 4 27General 13 3Microgeneration 7 0

Number of Policies and Regulations EU-wide

UK-wide

Scotland-only

England and Wales-only

Wales-only

England-only

GB-only

27

52

11

10

23

45

The map4 demonstrates that the sheer number and complexity of these policies and regulations, with the many potential interactions and conflicts, is a risk in itself to businesses wishing to invest within the UK. Added to this are the growing complications arising from the potential need for harmonisation of regulations with the increasingly influential devolved regions in the UK.

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Part L (Conservation of fuel and power) of the Building Regulations for new dwellings L1A

National Infrastructure Plan

Part L6 gives specific guidance on how to meet the energy efficiency requirements of the Building Regulations for new dwellings. Changes to Part L occur approximately every three years in order to raise the energy efficiency of new dwellings planned after the regulations have been upgraded. This maintains progress towards building zero carbon new homes from 2016, a goal which has been clearly defined and industry has long understood.

The government published the first National Infrastructure Plan in October 2010, showing its spending strategy for UK infrastructure across energy, transport, communications, flood, waste, water and intellectual capital. The latest version – ‘National Infrastructure Plan 2013’7 – details 270 projects worth over £384 billion.

Key Findings from the Survey

• 61% of respondents answered that their businesses had been affected by Part L (conservation of fuel and power) of the Building Regulations for new dwellings.

• On balance, 63% of respondents reported that the policy has had a positive impact on their businesses with over half of companies reporting investment as a result of its introduction (14% balance).

• Across all areas, the results for Part L were positive and as a result a balance of reported that the policy has improved their view in terms of preparing for future policies/regulations.

Key Findings from the Survey

• On balance, 50% of respondents reported that the policy has had a positive impact on their businesses with 44% (-6% balance) reporting investment as a result of its introduction.

• Despite mixed results for the National Infrastructure Plan, 39% of respondents on balance said that it had improved their business view in terms of preparing for future policy.

Help to Buy

Help to Buy8 is a UK government scheme announced in Budget 2013 that supports the demand side of the housing market by backing equity loans, mortgage guarantees, shared ownership and other options for buyers. The equity loan option was initially intended to run until 2016, but it was extended to 2020.

Key Findings from the Survey

• 56% of respondents answered that their businesses had been affected by Help to Buy.

• On balance, 97% of respondents reported that the policy has had a positive impact on their businesses but two-thirds of firms reported that they had not invested as a result of its introduction (-33% balance).

• Although the responses across the various areas were mixed, around one third of firms (32%) reported that the experience with Help to Buy had improved their business view in terms of preparing for future policies and regulation.

Help to Buy

2013 - 2020

56%business had been affected

97% 32%improved business

positive impact on business

6. http://www.planningportal.gov.uk/buildingregulations/approveddocuments/partl7. https://www.gov.uk/government/publications/national-infrastructure-plan-20138. https://www.gov.uk/affordable-home-ownership-schemes/overview

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The Green Deal

Energy Company Obligation (ECO)

The Green Deal10 was launched in January 2013; it is designed to enable households to benefit from energy efficient home improvement without the upfront cost of installation. Instead, the cost of installation is paid over an extended period via the savings accrued on energy bills coming from the improvements.

The ECO scheme9 was introduced in January 2013 to support energy efficiency improvements to homes, particularly for low-income and vulnerable households and difficult to treat properties. Originally intended to provide approximately £1.3 billion funding per year to 2015, however, changes to the scheme meant that annual spend will be reduced with less support for hard-to-treat properties.

Key Findings from the Survey

• 38% of respondents answered that their businesses had been affected by the Green Deal.

• On balance, 23% of respondents reported that the policy has had a negative impact on their businesses with over one third reporting investment as a result of its introduction (-23% balance).

• Across all areas, the results for the Green Deal were mixed but a third of respondents on balance reported that the policy had worsened their view in terms of preparing for future policies/regulations.

Key Findings from the Survey

• 38% of respondents answered that their businesses had been affected by ECO.

• Change to the scheme had a negative effect, according to 55% of firms on balance.

• Across all areas, the results for ECO were mixed. 52% of firms on balance, reported that the policy has worsened their business view in terms of preparing for future policies / regulations.

9. https://www.gov.uk/government/policies/helping-households-to-cut-their-energy-bills/supporting-pages/energy-companies-obligation-eco10. https://www.gov.uk/green-deal-energy-saving-measures/overview

13

EU Emissions Trading System (EU ETS)

The EU Emissions Trading System (EU ETS)11 is the largest emissions trading scheme and the EU’s key tool for reducing industrial greenhouse gas emissions. Launched in 2005, the policy impacts certain energy-intensive manufacturers by setting a limit on their greenhouse gas emissions which is lowered over time.

Key Findings from the Survey

• On balance, 64% of respondents reported that the policy has had a negative impact on their businesses with only 29% reporting investment as a result of its introduction (-36% balance).

Conclusion: Policy and Regulatory Risk SurveyThe key lesson from the survey was that policies were deemed to have a positive impact upon businesses when (1) sufficient consultation of industry prior to the policy introduction occurred; (2) when government provided clear outcomes and a long-term roadmap for delivery; and (3) further changes at UK or EU levels were avoided.

For the policies where a negative impact on business had been reported, business confidence in preparing for future policy and regulations was low. The exception is ECO, where the policy initially had a positive impact upon business, but due to changes (largely unwelcomed by business) which occurred to the policy later, industry came to view future policy and regulations negatively.

Policy Impact Upon Business

120%

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

-80%

Part L National Infrastruction

Plan

Help To Buy Energy Company Obligation

The Green Deal

EU Emission Trading System

11. http://ec.europa.eu/clima/policies/ets/index_en.htm

• The results for the EU ETS were generally negative and as a result a balance of -43% of respondents reported that the policy has worsened their view in terms of preparing for future policies/regulations.

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Energy Risk

UK manufacturers of construction products have largely supported the transition to a low-carbon economy, by focussing on finding innovative energy savings in the processes within their factories and improving the energy efficiency of the products themselves. Many, particularly in the energy-intensive sectors, argue that they have begun to reach the technical limits of improving their manufacturing processes. They now have serious concerns about their ability to compete on a level playing-field with international companies which are not subject to UK-specific energy and climate change policies.

These concerns relate not only to the added costs incurred by these policies, but also the resultant risks posed to the supply and security of energy12. Taken together, these concerns have begun to directly affect decisions about future investments in the UK. This section seeks to shed some light on these policy issues, and includes a survey of our members.

Cost

According to the Department for Business, Innovation and Skills, energy prices (including tax) are forecast to increase between 2015 and 2020 by 53% for energy intensive industries. This increase is 21 percentage points higher than Germany and 12 percentage points higher than Italy13 putting the UK at a future competitive disadvantage to our EU and non-EU competitors.

Supply

Due to the number of coal and oil fired power stations closing by the end of 2015 and the expected closure of nuclear power stations, supply may be an issue; however, the supply outlook is expected to improve in the second half of the decade.

Security

According to the Department of Energy and Climate Change in 2013, 47% of energy used in the UK was imported, up sharply from the 2010 level, due to the general decline in national oil and gas output14. With our reliance on gas expected to become more prominent by 2015 (as our domestic production from the North Sea declines) our reliance on gas imports will increase the exposure of the UK to the volatility of international gas prices.

More notably, the transition period between the closure of existing power generation and the creation of new, low carbon energy supplies will see an increased reliance on imports in the short-term. With an increased reliance on imports, the UK will be subject to potential instability of international markets, which could impact upon the security of UK energy.

The energy sector faces significant challenges over the next decade as it seeks to reconcile the simultaneous objectives of providing secure supplies whilst meeting renewable energy and decarbonisation targets.

In addition, with substantial quantities of the UK’s existing electricity generation capacity expected to be retired soon and delays to new supplies, there could be major implications for security.

The information and analysis here will seek to outline how the UK construction manufacturing and distribution industry perceives the impact of the energy landscape on business investment. To this end the Association surveyed its members15.

12. For the purpose of this study we will define ‘energy supply’ as the total quantity of energy available together with the mix of capacity (i.e. renewables, gas, nuclear, etc.) and ‘energy security’ as a non-specific measure of the amount of energy which is non-domestically produced.

13. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31768/12-527-international-policies-impacting-energy-intensive-industries.pdf

14. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/336617/UKEiB_2014.pdf

15. Survey conducted June through August 2014. Responses were received from 55 manufacturers of construction products and representatives from their supply chains, from the full spectrum of sub-sectors, some energy intensive and others less so.

15

Energy Survey Analysis

Government Impact on Energy Policy

Impact on Investment

We looked at the impact of energy across three measures; cost (the price paid by firms), supply (the total quantity of energy available for UK consumption) and mix (nuclear, gas, renewables etc), and security, which is a non-specific measure of the amount of energy that is non-domestically produced.

• Manufacturers were asked if energy policy had a considerable impact upon their firms’ decision to make a significant investment in the UK. Overall 46% of firms reported no effect, while 39% of respondents reported that policy had impacted upon their firms’ decision to invest.

• Of those firms that stated that energy policy had affected their decision whether or not to invest, only 4% declared that it had a positive effect. 65% stated that energy policy negatively influenced their firms’ decision to invest in the UK. On balance, 61% reported a negative impact on investment.

• The respondents were asked if the cost of energy had made a considerable impact upon their decision to make significant investment in the UK. Overall, 34% stated it had impacted upon their firms’ decision to invest, whilst 61% stated that this factor had no bearing on their investment decision making process.

• Of those who stated that cost had affected their decision whether or not to invest, only 9% of those said that it had a positive impact, while 50% stated that it had impacted their investment decision negatively.

• Respondents were asked if energy supply had a considerable impact upon their decision to make a significant investment in the UK. 17% stated it had impacted on their decision, whilst overall 71% of respondents stated it had not impacted on their decision to invest in the UK.

• Of the respondents who stated that supply had impacted on their firms’ decision to invest in the UK, 39% stated the decision had impacted negatively on investment. None stated it had impacted positively upon their decision to invest.

• Manufacturers were asked if security of energy had a considerable impact upon their firms’ decision to invest within the UK. 15% stated that security was a contributing factor in their decision whether or not to invest, whilst overall, 73% stated it had not impacted on their firms’ decision to invest.

• 38% stated that security of energy in the UK had negatively impacted upon their investment decision with none of the respondents stating it had a positive impact.

• 86% stated that government policy negatively influences cost, leaving a negative balance of 83%.

• Only 17% thought that government policy positively impacted energy supply.

• 53% stated that they feel that government policy has a negative impact on energy security.

17%Positively Impacted Supply

Government Policy

53%Negatively Impacts on Energy Security

86%Negatively

Influences Cost

Only

16

International Comparison

• 41% stated that they thought the cost of energy in the UK is not competitive with the rest of the EU (inclusive of taxes, compensation and associated costs).

• 81% of respondents are either not sure or do not feel that future energy costs will be competitive compared to the rest of the EU in the future.

Conclusion: Energy SurveyThe survey has revealed that energy policy has not significantly impacted on current investment decisions; however, with concerns around rising energy costs and the future security of supply, most respondents have indicated that UK energy policy will have a negative impact in the long-term. Without confidence in UK energy policy over the investment timeframe of a typical manufacturing facility (10-30 years), most respondents will be unable to build an investment case for their UK or foreign-headquartered boards.

Whilst the data highlight these contrasts, the Association points out the wider issues: industry has committed to securing a transition to a low carbon economy; however, this must not jeopardise jobs, businesses and investment. Most construction materials and products can now be profitably imported. Increasing energy costs that support plans to alter the UK’s energy supply mix must not put the UK at a disadvantage with our international competitors.

• Three-quarters of respondents were either unsure or do not feel the future supply and security of energy in the UK, compared to elsewhere in the EU, will adequately meet the demands of businesses investing in the UK.

In a transition period between the closure of existing power generation and the creation of new, low carbon energy supplies, UK government policy needs to offer confidence to business that security of supply within the UK will adequately meet the needs of a growing industry.

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The Way Forward

This report demonstrates that there are many positive reasons to invest in the UK compared to other countries. In certain sectors, however, regulatory and policy risk is very real and hindering investment despite the growing signs of recovery in the construction market.

To help reduce risk, foster certainty and build confidence for industry to encourage investment, innovation and growth, it is recommended that government should:

Ensure that regulations are clearly defined, measured by performance and target-driven, but not prescriptive. Policy and regulation should be clear and unambiguous with minimal administrative burden. The combined effect of UK and EU regulation on industry should be considered when developing new UK policy.

Consult early and regularly with industry and across all relevant government departments to identify problems, review measures, provide solutions and evaluate results. Government should give due consideration to all sectors before making decisions on key market driving policies. Particular attention should be paid to the risk of cumulative impacts and unintended consequences arising from the implementation of new policy.

Provide certainty by publishing a long term plan – not just over five-year parliamentary cycles – with clear goals to allow time for industry to prepare and plan investment. It takes time for industry to have confidence in the delivery of a new government plan. Developing a track record of adherence to planned roadmaps and targets will build confidence.

Avoid making unplanned changes once a policy is implemented. Consistency of policy helps industry to invest. Where change is unavoidable, consultation with all relevant stakeholders will ensure problems are addressed quickly and negative impacts are minimised.

Cross-party consensus should be sought in advance for policies which are key market drivers (e.g., housing and infrastructure) to prevent harmful changes occurring due to party politics. A strong, local UK supply

chain is fundamental to delivering such policies, but the future for products and materials manufactured here (with increases in investment and fewer imports) will only be guaranteed if UK and multi-national companies have confidence that policy really is for the long-term.

Industry’s Role

Industry also needs to demonstrate leadership and play its part in helping develop effective policy and regulation. We can do this by working together to establish a consensus and:

• Speaking with one united voice as a supply chain to government.

• Providing government with high-level, outcome-focussed, strategic input which avoids commercial differences.

• Supporting well-considered, effective regulations with credible, practical solutions which are fact and evidence-based.

18

AcknowledgementsThe Construction Products Association would like to thank the following people who helped with this project:

The Construction Products Association wishes to offer special thanks to Saint-Gobain and its secondee to the Association, Ms. Jade Lewis, who managed the project to deliver this report.

Steering Group:

Dr Laura Cohen British Ceramic Confederation

Sarah Brook British Gypsum

Martin Casey CEMEX

John Slaughter Home Builders Federation

Dr Richard Miller Innovate UK

Steven Heath Knauf Insulation

Nigel Jackson Mineral Products Association

Mike Leonard Modern Masonry Alliance

Tony Smith Pilkington Group

Steve Severs Saint-Gobain Glass

Jonathan Clemens / Murray Bean Tata Steel Europe

Keith Jones Wolseley UK

Neil Schofield Worcester Bosch Group

Others:

Andrew Warren / Pedro Guertler Association for the Conservation of Energy

Claire Curtis-Thomas/ Jon Denyer / Chris Hunt British Board of Agrément

Alasdair Reisner Civil Engineering Contractors Association

Tony Howard / Adam Evans / Emma Link Construction Industry Training Board

Jon Lovell Deloitte

Tony Mulcahy / Nicola Walters Department for Business, Innovation & Skills

Neil Prothero Engineering Employers Federation

Michael Sulston Glass & Glazing Federation

Roger Webb Heating and Hotwater Industry Council

Walter French Mark Group

Brian Baker / Brian Andreas Saint-Gobain

Phil Birch Sweett Group

Tadj Oreszczyn UCL Energy Institute

Policy Team UK Green Building Council

Mike Carroll UK Trade & Investment

[Case Studies Appended Here]

The Impact of Par t L on the Boiler Industry

Key Impact – Entire supply chain successfully converted to condensing boilers following changes to Part L of the Building Regulations

The Seasonal Efficiency of Domestic Boilers in the UK (SEDBUK) rating is the average annual efficiency achieved in typical domestic conditions and is quoted in a series of bands from A to G. From the 1st April 2005, revisions were made to Approved Document L1 for England and Wales

(and later in Scotland) that meant, unless there were exceptional circumstances, a SEDBUK A or B rated system was required when installing new or replacement gas fired boilers. This compelled the use of a condensing boiler.

High efficiency boilers of band A and B had been available since the 1980s and the technology was used on the continent, but with less than 10% of the market share in the UK. Following the regulation changes all manufacturers had to invest to make the necessary product changes.

Neil Schofield, Head of External & Governmental Affairs for Worcester Bosch Group said “We invested £12million in preparation for the changes to Part L because we had certainty

that the changes would go ahead. The instructions were clear, government consulted with the industry, we had three years to prepare and it happened as they said it would.”

A year on, almost 100% of the boiler market in the UK was for condensing boilers as a result of the changes. By 2012, 44% of the housing stock (9.9 million dwellings) had a condensing boiler (32% of dwellings had a condensing-combination boiler); 12% had a standard condensing boiler).1

Policy/regulation background

What was the impact on the Construction Industry?

1 English Housing Survey Headline Report 2012-13

A long term trajectory with clear goals is needed allowing time for the industry to prepare. Keep regulation simple and introduce proposed changes on time, as planned to the standard originally set out. Once implemented do not make changes.

Consult widely and work in partnership with industry to identify, review measures, provide solutions and evaluate results.

Provide training where required to up-skill and engage the supply chain.

Use a variety of grants, incentives and regulation to create effective change.

The industry knew in advance with Part L what the changes would be against a published trajectory and end point. There was significant consultation on the proposals. The regulation was very simple and clear, giving no uncertainty and a reasonable timeframe to prepare. There has not been a change in direction since.

Government worked in partnership with the industry to identify any concerns and provide solutions. Government

funding was provided for training of installers, which was instrumental in changing the mind-set of the industry, and a package of incentives and grants introduced to help the process. One respondent to the survey said “The government didn’t back off from what they said they were going to do. We used to know at least two stages ahead what the changes would be. Everyone knew the trajectory. What is not good is failing to deliver on time as planned and to the standard originally set out.”

Key lessons

What worked/required improvement?

www.constructionproducts.org.uk

The Impact of Par t L on Glass Manufacture and the Glazing Industry

Key Impact – Over £70 million invested in flat glass manufacturing following changes to Part L of the Building Regulations

A change made to the 1995 edition of Approved Document L was that the U-value standard for windows and doors was based upon double rather than single glazing. The U-value was gradually tightened through subsequent editions. The changes made in 2002 required a minimum Windows Energy Rating (WER) Band E and meant that the requirements for windows manufactured with certain frame materials could not be met without the use of a special low emissivity coating required to control heat transfer through glass. Further changes in

2010 required a minimum performance of WERs B and C, which essentially necessitated the use of a high performance low-E glass in double glazed units.

Policy/regulation background

It takes time for industry to have confidence in the delivery of a new government plan. Adhering to planned roadmaps and targets builds confidence.

In order for manufacturers to plan investment they must have certainty around about the intended impact of government policy and when it will happen.

Regulations must be enforced.

The changes made to Part L had a profound impact on glass manufacturing in the UK by initially creating a shortage for energy efficient glass in the UK and forcing manufacturers to import product from Europe. The regulation, however, provided the impetus for Saint-Gobain Glass (a division of Saint-Gobain S.A. of France) to commit to a multi-million pound investment in a new coating line. Guardian Industries UK (a division of

Guardian Industries of Michigan, USA) and Pilkington Glass (a division of Nippon Sheet Glass Co. of Japan) also invested approximately £35 million each on new coaters in 2012 and 2013 respectively and created additional jobs within the industry. The industry was able to develop products and innovate due to confidence in the new regulations. Industry required a guarantee of usage which came from the regulations.

Intended plans for Part L were published ahead of changes being made; however, due to uncertainty around timing, investment decisions were not made quite quickly enough to supply the market demand brought about by the regulation changes.

It takes a long time for businesses to plan, approve, carry out required engineering and then commission a new plant. The regulation was simple and it required straight forward certification which was easy to enforce. Hence, it proved successful in stimulating investment.

Key lessons

What was the impact on the Construction Industry?

What worked/required improvement?

www.constructionproducts.org.uk

The Impact of the National Infrastructure Plan

Key Impact – Clarity provided around the pipeline of work, but further delivery is required before major investment from industry follows

For many years industry has called for better clarity on future programmes of infrastructure work and policy requirements.

The National Infrastructure Plan aims to do that, though the Plan is relatively in its infancy.

Policy/regulation background

Certainty is provided by publishing a long term plan with clear goals to allow time for industry to prepare and plan investment.

In order to bring about major investment it takes time for industry to have confidence in a new government plan.

There must be evidence of delivery (i.e., “spades in the ground”).

Alasdair Reisner, Director of External Affairs at the Civil Engineering Contractors Association says that “We very much welcome that the National Infrastructure Plan has brought industry together. It has provided information that helps suppliers to invest more effectively in the skills and innovation required for future infrastructure projects, which will deliver more cost effective and efficient schemes to the taxpayer.

“While it provides useful information, and is a step in the right direction, at the moment the supply chain does not necessarily have 100 per cent confidence in it to allow them to base business decisions on it.”

Paul Thompson, Marketing Manager for Saint-Gobain PAM (a division of Saint-Gobain S.A. of France) said “The key focus of the plan for me is the road programme and so we have followed the plan closely since its first publication and subsequent updates. We have used it to focus our commercial and product development activities.

“We have been impacted, I would say in a positive way, as it has outlined a return to investment in our road network and importantly given visibility of strategic projects and their timescales.”

The plan helps provide clarity on the way forward, but it is in its early days, and so has not been around long enough to provide confidence in the scheme and lead to significant investment. Further development is required to clarify specific policy interventions and give more certainty to industry.

Key lessons

What was the impact on the Construction Industry?

What worked/required improvement?

www.constructionproducts.org.uk

National Infrastructure Plan 2013

Articulating the government’s vision and strategic objectives for UK infrastructure

Assessing the UK’s infrastructure needs now and in the future

Setting out the government’s policy approach in each sector

Identifying the priority projects supporting that policy approach

Setting out a plan for infrastructure delivery

The Impact of the Help to Buy Scheme on Construction Product Manufacturing

Key Impact – Five multi-million pound brick manufacturing plants revived following the introduction of the Help to Buy scheme

The government introduced the Help to Buy scheme with the objectives of increasing demand for new homes, making

mortgage finance more accessible and affordable and encouraging developers to build more new homes.

Policy/regulation background

The Help to Buy (equity loan) scheme was launched on 1 April 2013 and in the first 15 months (to end June 2014) there were 27,167 properties purchased with the support of the scheme1. The Help to Buy (mortgage guarantees) scheme was launched later on 08 October 2013 with 7,313 mortgages completed in the first six months2. HMRC reported 980,290 residential property transactions during the 2013-14 financial year, meaning the Help to Buy has underpinned less than 3.5% of total home purchases during this time. However, Simon Hay, CEO at the Brick Development Association, said “I believe it has stimulated a much broader change in mortgage lending

and been fundamental in starting the housing revival, which has boosted confidence.”

As a result of the improved market, Ibstock Brick Ltd (a division of CRH Group of Ireland) has invested more than £22 million in the redevelopment of its factory in Chesterton and re-commissioned one of its previously mothballed manufacturing sites in Leicester. Hanson plc (a division of Heidelberg Cement Group of Germany) has made a multi-million pound investment to re-open their mothballed Lancashire factory and Wienerberger Ltd (a division of Wienerberger AG of Austria)

What was the impact on the Construction Industry?

1 https://www.gov.uk/government/statistical-data-sets/help-to-buy-equity-loan-scheme-monthly-statistics 2 https://www.gov.uk/government/publications/help-to-buy-mortgage-guarantee-scheme-quarterly-statistics-october-2013-to-march-2014

Government can have a significant positive impact on the construction industry at a very low cost.

Contingency plans are required for any short term scheme to limit the implications to the supply chain at the end.

The Help to Buy scheme (in particular that linked to new build) has been effective in increasing demand for new housing, and the recent extension of the scheme has improved confidence

in government’s commitment to support a housing market recovery.

Key lessons

What worked/required improvement?

www.constructionproducts.org.uk

has re-opened two of its mothballed factories in Hartlebury, Worcestershire and Ewhurst, Surrey.

Annette Forster, Marketing Director at Wienerberger commented, “The construction industry has benefited from and was positively influenced by Help to Buy and other government initiatives. The government needs to be firmer in its approach towards constructing sufficient new homes and the practicality, sustainability and affordability of construction materials are a key part of the issue.

“The housing crisis stems from a huge and varied range of factors, and a coherent national housing strategy that outlines

investment, processes, design requirements and local devolution to free up planning and help the industry to make more accurate investment decisions will be helpful.”

One respondent to the survey commented that “This scheme shows the positive way in which government can intervene to help get a market segment moving.”

It is, however, only a short term scheme and there is nervousness around it coming to an end, with one survey respondent saying “To avoid damage to the supply chain, the scheme needs to be unwound slowly with other processes in place to boost new build.”

The Impact of ECO and Previous Schemes on Insulation Manufacturers

and the Supply Chain

Key Impact – £ multi-million financial losses and thousands of job cuts due to changes in energy efficiency policy

The Energy Company Obligation scheme (ECO) replaced the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP) that ended on 31 December 2012 and had run since 2008/9. The scheme was intended to run for 10 years alongside Green Deal.

In October, however, less than a year into the scheme, the Prime Minister’s announcement about reducing energy bills for consumers led to overnight changes in ECO delivery. This was followed by cuts and a move from Solid Wall Insulation (SWI) support and the original intention for ECO.

Policy/regulation background

CERT and CESP ran for a number of years and successfully lead to the installation of many energy efficiency measures. CERT alone resulted in the insulation of 3.9 million lofts (plus additional DIY jobs) and 2.5 million cavities1. All participating businesses had to invest in processes, people, training, etc., in order to deliver the schemes, which in turn increased consumer awareness and insulation of homes.

The end of CERT and CESP, with the introduction of ECO, saw an immediate drop-off in demand for insulation products, significantly impacting upon manufacturers and resulting in job losses from the industry. The impact was made worse by the failure of Green Deal to take off. SWI installations fell from 77,000 under CERT/CESP during 2012 to 25,000 under Green Deal and ECO in 2013 and Cavity Insulation fell from 637,000 to 163,000 installs2. Research carried out by the Insulation Industry Forum showed that over 1,700 people lost their jobs

during this transition, with a further 1,200 having been placed on notice for redundancy3.

For a while the market was slow to develop while the supply chain adapted to the changes. Business was just starting to pick up when the government announced possible cutbacks to ECO in an attempt to reduce energy bills for consumers. This led to a rapid decline in activity while a decision was considered and later confirmed that CERO would be cut by a third, eligible measures would be redefined and other changes made that effectively reduced the funding available for insulation products. Orders were lost to businesses and a lack of confidence in the industry was created.

As a result, for example, manufacturer Superglass Insulation Ltd (of Stirling, Scotland) put the business up for sale, while the Mark Group (of Leicester, England) announced plans to cut

What was the impact on the Construction Industry?

Wherever possible government should not change central elements of a policy/scheme once it is put in place. Long-term schemes with long-term horizons and not just five year timescales are required for significant investment to be mobilised within construction product manufacturing. Consistency of policy helps industry to invest.

Keep the policy simple with minimal administrative burden and allow time for industry to gain confidence in a policy.

Allow a transition period between the end of one policy and start of other, overlapping schemes wherever possible.

Broad political consensus is needed to depoliticise key drivers in markets that are critical for delivering future needs. Government should give fair consideration to all sectors before making decisions on key market driving policies.

CERT and CESP worked better than the current scheme because they lasted a while without being significantly changed and therefore created confidence in the policy. The ECO scheme was extremely different in design and measures funded to CERT and CESP yet there was no transition period between

the end of one and start of the other which significantly impacted the insulation industry. Last minute changes and sudden changes of direction (industry had been gearing up for Hard to Treat and Solid wall solutions) have led to a lack of confidence in this policy.

Key lessons

What worked/required improvement?

up to 670 jobs. Bill Rumble, Chief Commercial Officer at Mark Group, said: “We had geared our workforce up to meet the expected demand for insulation and other energy efficiency installation work as a result of the ECO scheme, but changes to its structure have had knock-on effects that we can no longer avoid.”4

In addition, SIG plc (of Sheffield, England) recently announced that it has sold its home insulation installation and contracting business. This follows a loss before tax of £5.2 million due to a significant downturn in market volumes following the end of the Carbon Emissions Reduction Target scheme, subsequent lack of traction from the Green Deal and continued market uncertainty surrounding the Energy Company Obligation.

John Garbutt, Marketing Director for Kingspan Insulation (a division of Kingspan Group plc of Ireland) said “The implementation of ECO has on the whole been botched. The cliff edge created at the transition into ECO from CERT/CESP decimated the insulation contracting industry and created a loss of manufacturing demand, which has been particularly damaging to the cavity wall and loft insulation industries. DECC has attempted to rescue the SWI industry with the revised cash-back scheme, but botched that too by leaving loopholes

that have allowed cash back vouchers to be hoarded by providers without SWI installations on hand. This has killed the cash back scheme for now, which has delivered far less than intended market activity.

“If ever there was an example of how not to implement policy it is ECO. At the end of the day, the problem stems from Treasury and No10 listening too much to the utilities. Thankfully Kingspan is not dependent on the likes of ECO and Green Deal to prop up its business but, sadly, others are.”

Many comments were given in response to the survey, with a few examples shown below:

• “The reduction of targets dramatically reduced the market overnight!”

• “Demand for solid wall insulation never really materialised at the expected scale and dropped off considerably as targets were scaled back. A large amount of investment and resource was put into supporting this policy and when the funding was significantly reduced, without warning, we had to re-deploy our resources to other sectors, which took time and money. So yes, the initial sales were good, but the backlash of it was not so good.”

www.constructionproducts.org.uk

1 Final report of the Carbon Emissions Reduction Target (CERT) 2008-2012 by Ofgem 2 Green Deal: watching brief (part 2) – Association for the Conservation of Energy – February 2014 3 House of Commons Energy and Climate Change Committee The Green Deal: watching brief First Report of Session 2013–14 Volume I, May 2013 4 Building, Vern Pitt, 11 September 2014

The Impact of the Green Deal

Key Impact – Lost industry investment due to the failure of the Green Deal

The government set out a policy ambition to improve the UK’s ageing building stock with an aspiration to retrofit 14 million

homes by 2020. The key mechanism for doing so was to be the Green Deal.

Policy/regulation background

There was much scepticism surrounding Green Deal from the start; however, many saw it as an opportunity and invested in the necessary certification, training, restructuring and recruitment in order to work within the qualifying framework that was required of the scheme. As a result, at the end of July 2014 there were 392 registered assessor organisations, 156 provider and 2,735 installer organisations.1 All of this came at significant cost and effort for the sector.

Despite a provisional 910,000 measures being installed in approximately 754,000 properties through ECO, Cashback, Green Deal and the Green Deal Home Improvement Fund to the end of June 2014, only a meagre two per cent of these were actually funded via the Green Deal. This is vastly different to the original vision set by government and left many companies not realising a return upon investment.

John Sinfield, Managing Director of Knauf Insulation Northern Europe (a division of Knauf Group GmbH of Germany) said “We invested in excess of £750,000 in developing and certifying systems for the ECO / Green Deal market. I’ve had to downgrade paybacks twice now – to the point where ROI is non-existent. This has had a negative impact in the willingness of the Group to invest in the UK. They will invest in other markets and countries where the likelihood of a return on the investment is much more certain than this country.”

Marcus Jefford, Operations & Marketing Director at Greenworks said “Following all the communication on Green Deal from the Department of Energy and Climate Change, Greenworks invested heavily in the promotion of training and accreditation to the Saint-Gobain Building Distribution network of customers. The marketing of the Green Deal exceeds £80,000 with even higher costs for setting up networks and training locations around the UK to satisfy the expected demand suggested by government. Greenworks in 2014

scaled-back this expense due to lack of demand from both homeowner and installer.

“There was also a significant cost to the individual small to medium installers in gaining accreditation and lost earnings while training. Whilst Greenworks would always promote training to customers this should always be linked to a return on investment and it would be true to say that an installer would find it difficult to gain a return on this investment in today’s market.”

Ryan Taylor, Founder and Managing Director of Taylor Building Contractors (of Leicester, England) commented “I invested heavily into the Green Deal and saw this as a great route to market; my business was already promoting renewables and the link to Green Deal was a natural step. Over 12 months I trained to become a domestic energy assessor and a Green Deal assessor along with gaining PAS 2030 for a range of measures within the Green Deal offer. This training has cost my business over £5000 and untold lost earnings on time to gain these accreditations.

“Since gaining the accreditation I have had to significantly change my business model due to the lack of take-up within Green Deal and now my business focuses on ECO work. Although the Green Deal installer accreditation still serves my business well the retail aspect of Green Deal was the vision I would have preferred.”

Craig Chambers, Managing Director of Celotex Ltd said “Celotex supported the Green Deal/ECO policy process heavily both through a secondment to DECC and by developing an Internal Wall Insulation solution to address the anticipated drive under Green Deal and ECO to insulate solid wall properties. This area was for so long ignored under previous schemes. Investment in the necessary certification and in the setting up of installer training programmes required

What was the impact on the Construction Industry?

1 Domestic Green Deal and Energy Company Obligation in Great Britain, Monthly report, DECC, August 2014

Government needs to understand the system (including all the stakeholders involved; e.g., consumers, supply chain, etc.), determine what intervention is needed to create the desired outcome in policy success, and have a good feedback loop so that fast changes can be made when required to address problems without having a negative impact on those involved.

Long-term, built-in incentives help to give certainty to industry.

Keep policy simple.

The consumer was not sufficiently consulted in the development of the scheme, hence consumer demand was not there and there were no drivers at the start of the scheme. Improvements should have been implemented quickly to drive uptake; the cashback scheme only came later. ECO was intended to be a major driver, being designed to work hand in hand with Green Deal finance; however, this didn’t happen in practice.

The scheme is viewed as being too complex and the marketing has failed to communicate a clear proposition. It does not include or embrace the main supply chains for the products involved, which are small independent contractors or sole traders – manufacturing and distribution is actually missed from the model. There is no feedback loop for the sector to understand cost and implications of the policy design.

Key lessons

What worked/required improvement?

significant dedicated resource, with total costs reaching into the many tens of thousands.

“The lack of traction of Green Deal after its ‘soft launch’ and a poor transition between CERT and ECO unfortunately means that Celotex would have been far better to invest in other areas of business, driven by normal market forces, rather than those reliant on government initiatives.

“The requirement to insulate the large number of solid wall properties remains and there is a real danger that industry will lack the confidence to fund the product innovations required if policy from Government is not clear, certain and more permanent in nature.”

A number of additional comments were received. Here are just a few:

• “My Group has zero faith in UK government policy in the retrofit arena, which makes it pretty hard to win investment.”

• “Selling Green Deal to the board / management has become much more challenging as it ‘didn’t fly’ the first time around.”

• “Constant changes to supporting policies (such as ECO, Green Deal and the Green Deal Home Improvement Fund) have harmed consumer and industry confidence in government’s policies and the supply chain is going to be wary of investment as a result.”

• “It didn’t materialise as discussed and proposed in its early days. Initial investments haven’t paid off and led to redundancies.”

www.constructionproducts.org.uk

The Impact of the EU Emissions Trading Scheme

Key impact – Major uncertainty created within certain sectors, hindering further investment in UK manufacturing

Launched in 2005, the European Union Emissions Trading Scheme (EU ETS) is now in its third phase, running from 2013 to 2020. Each phase has placed differing rules and expectations upon industry. A major revision approved in 2009 in order to strengthen the system means phase 3 is significantly different

from previous phases. Many UK manufacturing sectors such as cement have been participating in the scheme since its launch in 2005. Others, such as wall and floor tile manufacturers, were required to join from 2013. It was a new tax for them which their non-EU competitors did not have to pay.

Policy/regulation background

Frequent threat of interventions at the EU and UK levels and differing rules throughout the three phases have been at the core of the issue over policy uncertainty. On three particular occasions the policy was changed and caused periods of real concern while the details were being finalised; pre 2013 proposals, revision of the 2015 to 2019 scheme and post-2020 scheme (still under consideration). This confusion has been exacerbated by new proposals (including by UK government) to make further changes to the existing rules.

In addition, there remain serious questions for some UK businesses, such as manufacturers of clay roof tiles, bricks and clay drainage pipes, about long-term inclusion onto the “carbon leakage list” and whether they will qualify for more free allowances because they face competition from

industries outside the EU which are not subject to comparable greenhouse gas emissions restrictions.

Taken together with poor energy security, other taxation schemes and additional UK carbon policies, the cumulative impact of this adds to the uncertainty for businesses looking to invest in the UK.

Dr Laura Cohen, Chief Executive of the British Ceramic Confederation, said “During these periods of uncertainty remain were concerned about investing in these sectors in the UK, putting decisions (about major investments in plants that need to last 40 years) on hold while awaiting clarity to see if they have a viable business model for the long-term.”

What was the impact on the Construction Industry?

www.constructionproducts.org.uk

Be mindful of the combined effect of UK and EU regulation on industry when developing new UK policy – the whole energy efficiency policy area needs simplification. Be fair and sensible when transposing EU regulations into the UK.

Pay particular attention to the risk of cumulative and unintended consequences as a result of implementing new policy.

Consult with all relevant sectors well ahead of making changes to a policy.

The scheme was changed and industry was not consulted. The transposition in the UK was very inflexible by the regulating body; e.g., the “six month rule” which can put off manufacturers from investing in larger projects. The scheme is very complex and counterproductive, leading to the risk of “carbon leakage”

(i.e., if because of the costs related to climate policies, businesses move manufacturing to other countries which have fewer constraints on emissions, total global emissions potentially increase. This risk may be higher in certain energy-intensive industries.).

Key lessons

What worked/required improvement?

Martin Warner, Chief Executive of Michelmersh Brick Holdings plc, said “The government continues to promote policies which lead to an unequal playing field with our international partners. In particular, taxes on electricity will increase hurdles to investment leading to the export of further jobs with no consequent reduction in carbon consumption. We are always looking to invest, but due to these and other issues will make it more difficult to make the numbers stack up. All projects have to provide a return.”

Dr Richard Leese, Director, Energy and Climate Change at the Mineral Products Association, wrote “The cement industry does not have access to any of the £400 million of aid that the government has put aside to compensate energy intensive industries for the indirect costs of the EU Emissions Trading Scheme (EU ETS) or the Carbon Price Support (CPS). The result is that some sectors that compete with cement in the construction market receive compensation for both indirect EU ETS cost and CPS, while the cement sector does not.

This is preventing the cement sector from competing on a level playing field with other European competitors and UK sectors. The inability to receive compensation against this unilateral UK tax will increase current imports of cement to unprecedented levels and it will threaten the much needed investment, businesses and jobs that our members create. It will also undermine both the security of supply of essential materials to the UK economy and also valuable exports.”1

Other comments received from respondents to the survey say that the EU ETS:

“Has led to uncertainty about the future, created an uneven playing field for UK operators.”

“We are investing more in the US and China as a result of the unilateralism inherent in the EU’s approach to carbon pricing. Until there is a global carbon market the ETS needs to be very modest in ambition to avoid distorting competition for the energy intensive industry.”

1 MPA letter to the Energy and Climate Change Committee, August 2014

Construction Products Association 26 Store Street London WC1E 7BT

Tel: 0207 323 3770

www.constructionproducts.org.uk