Memorandum submitted by Greater London
Authority
INTRODUCTION
The following represents the Greater London
Authority's (GLA) submission to the Trade and Industry Committee's
Inquiry into the UK's construction industry.
In February 2006, GLA Economics published a
review of London's construction industry in Laying the Foundations:
London's Construction Industry. Against the backdrop of the
Mayor's spatial development strategy, The London Plan, the aim
of the study was to develop a deeper understanding of a sector
that is traditionally hard to measure and identify whether the
construction industry can adequately meet the demands that economic
growth will place upon it. This submission draws upon the findings
of that review.
SUMMARY
The worldwide and domestic construction industry
will be able to meet London's requirements for the foreseeable
future. Construction in London is a small part of the capital's
overall economic activity (5%). The capital has in the past managed
to proceed simultaneously on many large projects—such as
Wembley and T5 in recent years, and the Jubilee Line and the Thames
Barrier in the 1970s—and it will continue to do so in future.
It will be able to deliver large programmes and projects such
as the Tube PPP and other transport improvements, such as the
Thames Gateway Bridge, alongside the Olympics and Crossrail in
order to maintain London's globally competitive position.
The representation of women, black and ethnic
minority and disabled people in the construction industry is relatively
low compared to other sectors of the economy and the Mayor of
London is determined to support efforts to increase the diversity
of this part of the workforce.
THE NATURE
OF LONDON'S
CONSTRUCTION INDUSTRY
Output and Employment Trends
1. As in the rest of the UK, construction
accounts for a relatively small proportion of total economic activity.
In London, construction represents around 5% of its economy.
2. London's construction industry has a
total output value of £8 billion in 2005, employing 200,000
workers or 4.5% of London's total employment. The construction
sector is characterised by rising real output but little change
in employment. This is perceived to be partly a function of increased
labour productivity and partly due to the unreliability of statistics—the
prevalence of small business, contracting, sub-contracting and
cash payment makes the sector difficult to assess.
3. The composition of the industry in London
is different from the UK due to its greater levels of private
commercial building. London has a much greater share of private
commercial construction (27.9% and 16.6% respectively).
4. The construction industry is highly fragmented,
mostly being British companies catering for a British market and
none holding a dominant position in the market as a whole.
5. It is estimated that there are more than
90,000 construction businesses in London and almost 89% of these
are made up of self-employment—a slightly higher share than
nationally. 80% of London's construction firms are not registered
for VAT, also a higher share than nationally. The share of self-employment
varies due to legislation defining construction work but is usually
35-45% of all construction jobs.
6. Small firms in London make up almost
94% of all construction firms, employ 39% of all construction
workers and provide 20% of the construction work done. Medium-sized
firms make up almost 6% of all construction firms, employ 30%
of workers in the construction sector and account for 34% of the
work done. Large firms have nearly half a percent of the share
of construction firms, employ 31% of workers and carry out 46%
of the work done.
Construction demand in London
7. The GLA report provides four key drivers
of demand for construction in London:
— new housing demand resulting from
population growth and household composition changes;
— demand for non-residential premises
arising from economic growth (ie commercial, industrial and public
premises);
— investment in London's infrastructure;
and
— repairs and maintenance.
8. New housing is 10% of total construction
activity, mostly private housing. Other new non-housing work is
over half of all activity. Infrastructure also accounts for 10%
of the total but is expected to be the best-performing sector
from 2007 to 2011, averaging almost 11% annual growth. This reflects
large existing and planned projects such as Heathrow T5, the East
London and Docklands line extensions, the Victoria underground
station expansion and the Olympics. With work on Crossrail planned
to start before the Olympics, the growth rate will be higher.
9. The London Plan (2004) and subsequent
alterations reports set out the need for additional housing and
the policy to increase the overall supply of housing in London.
Mayoral policy aims to achieve an additional 30,000 homes per
year in London with provision up to 2006 based on 23,000 new homes
per year. This marks a substantial increase on the current average
annual number of housing completions. London has 16% of national
activity in construction but only 9% of new private housing. Therefore
it would appear prima facie that there is potential for London
to increase its housing construction activity, which will be required
for the new targets to be met.
10. The GLA projects that London needs 380,000
new dwellings over 2001—2016. This is over double the 150,000
that were built over 1991-2001. With an additional 600,000 jobs
forecast to 2016 it is expected this level of build will be met.
11. The final component of the demand drivers
for construction is repairs and maintenance. Around 50% of repairs
and maintenance work relates to housing, a ratio that has remained
largely constant over the past decade. While there is little statistical
evidence on the patterns of repairs and maintenance in London,
it appears that, as the stock of dwellings increases, then we
should expect the level of construction activity associated with
repairs and maintenance also to increase. As investment in new
housing increases, spending on repairs and maintenance is also
expected to increase (60% of London's construction activity is
new work and 40% is repairs and maintenance).
LONDON'S
CONSTRUCTION WORKFORCE
Occupational make-up
12. Construction occupations are not necessarily
confined to the construction industry and similarly not all jobs
in the construction industry are construction occupations. For
example, there are high numbers employed in construction occupations
in utilities, in parts of manufacturing, transport and communications,
and business services. Similarly, many jobs in the construction
industry may involve administration or sales and have little connection
with doing actual construction work.
13. Construction is distinctive in that
up to 50% of workers are in skilled trades occupations compared
to just 8% for London as a whole. In contrast, construction has
a lower share of jobs in higher-level occupations. Construction
in London has just 26% of workers in management, professional
and associate professional occupations compared to 53% for London's
workforce as a whole.
Distributional make-up
14. Currently the construction sector does
not reflect population groups adequately (in terms of gender and
ethnicity). The construction workforce has few women and a low
share of workers from BME groups. Men dominate the construction
sector. In London, only 10% of construction workers are women,
the lowest of any sector, showing that women are substantially
under-represented. Construction is also relatively unrepresentative
for BME groups. In London, 13% of construction workers are from
minority ethnic groups compared to 21% of London's workers as
a whole.
15. The GLA believes greater effort needs
to be placed on boosting the employment prospects for Black, Asian
and Minority Ethnic (BAME) people, women and disabled people in
construction. With the support of the Construction Industry and
Training Board—ConstructionSkills (CITB) and the Southern
and Eastern Region Trade Unions Congress (SERTUC)), the LDA and
GLA jointly commissioned a short exploratory study—The
Construction Industry in London and Diversity Performance.
It concluded that the structure and behaviour of the construction
industry acts as a barrier to the development of integrated skills,
training and employment of the population in a sustainable London
labour market.
Details on diversity performance of London's
construction sector can be found at:
(http://www.london.gov.uk/mayor/equalities/docs/construction_industry_feb07.pdf)
Skills make-up
16. Of London's construction workforce,
16% are qualified to NVQ4+, contrasting with the much higher London
average of 38%. 29% of London's construction workers have NVQ1
or no qualifications compared to the London average (18%).
17. Construction depends more upon workers
with middle-level qualifications. In particular, workers in construction
hold almost a quarter of all trade apprenticeships in London.
Over 18% of London's construction workers have trade apprenticeships
compared to less than 5% for London's entire workforce. Production
managers in construction are often qualified with over 40% holding
NVQ4. However, even in this management group, over a quarter have
qualifications of NVQ2 or below or no qualifications.
18. Around 64% of London's construction
companies reported difficulties in recruiting. The main skills
shortages were highlighted as being in "practical and technical
skills". However construction businesses in London have a
lower share of unfilled or hard to fill vacancies than the rest
of the UK.
19. Due to the inability to recruit in certain
trade areas, 75% of companies reported increasing workloads on
current staff and 47% reported an increase in operating/ labour
costs.
Training initiatives
20. It is estimated that the building work
and preparations for the games will create an estimated 150,000
jobs over the next seven years. New Opportunities (Round 2) funding
of £11million has been awarded by the LDA to 27 different
organisations to support Olympics-related training over the next
three years. In addition to this, the LDA will be providing in
excess of £10 million across London over the next three years
to support both construction and other vocational training associated
with the Games. It is understood that further funding for vocational
training will also be made available from the LSC in this same
period.
21. As part of the Government's skills strategy,
new specialist diplomas and GCSEs are being developed, such as
those in professional cooking, facilities management and construction.
Further education colleges in Newham and Hackney are working with
sector skills councils to provide local residents with literacy,
numeracy and communication skills, as well as skills in specific
trades needed for the Olympics. For example Hackney Community
College has teamed up with Westminster Kingsway, the best known
hospitality and catering college, to offer NVQs in these trades.
22. The "Train to Gain" project
aims to encourage employers to train their own staff. SummitSkills
and the Graduate Forum are supporting 200 undergraduates to get
more people from ethnic minorities into jobs on Olympic sites.
ConstructionSkills and employers are jointly funding scholarships
for female and ethnic minority students to study construction-related
degrees (applications are up 50% on last year).
The price of labour
23. Earnings for construction workers in
London are higher than the rest of the UK. The New Earnings Survey
is the main source for measuring wages—in 2003, workers
in skilled construction and building trades (standard occupation
code 53) in London recorded higher earnings than those in construction
trades across the UK as a whole (an average gross weekly wage
of £492 per week). This is 20% higher than the £409
for skilled construction and building trade workers in the UK
as a whole.
24. Construction wages have been growing
faster than wages for all industries and services, though not
by a large amount: between 2000 and 2006 hourly wages in construction
in London rose by about 1.3% per annum more than in all industries
and services in the UK as a whole. In the UK as a whole, hourly
wages in construction rose fastest for managers in construction
and lowest for those in elementary construction occupations, with
those for skilled construction and building trades in between.
25. Earnings are highest for trades such
as steel erectors and plumbers but lowest for trades such as glaziers,
decorators and bricklayers. The growth rates in full-time male
nominal wage rates are similar between 2000 and 2006 for All Industries
and Services (in the UK). Between 2003 and 2006, average nominal
wages for workers in the construction of motorways, roads, railways,
airfields and sports facilities has grown fastest (22.1%), whilst
average nominal wages for workers in building installation has
grown slowest (11.1%). The indices seem to be converging by 2006
except for nominal wages for workers in the construction of motorways,
roads, railways, airfields and sports facilities. The 11.1% growth
in average nominal wages for workers in building installation
between 2003 and 2006 is still above the growth rate for average
nominal wages for all industries and services over the same period,
which rose by 10.1%.
26. An economics consultancy, NERA, investigated
the relationship between prices and output at the national level
by considering whether we can observe a simple correlation between
increases in construction output and increases in construction
prices (in which increasing labour cost is a major component).
They did this for both construction as a whole and construction
of infrastructure. While there is some evidence of a positive
relationship, that is construction prices do rise when output
is increasing, the relationship is weak (NERA Cost Escalation
in Crossrail: A Report to CLRL Feb 2007).
Labour supply forecasts
27. GLA Economics presented six projections
of employment in London's construction industry for the coming
years. Two of these projections have been published by the GLA,
one is an IER projection for the Learning Skills Council and Sector
Skills Development Agency, and the remaining three are by commercial
consultancies. For 2012, three of the projections (GLA and IER)
suggest that employment in the industry will fall, while the other
three suggest it will rise. The range of the projections for 2012
is from 155,000 to 275,000, compared to the current estimate of
around 200,000. Figures from an Experian report suggest growth
is expected to continue within the construction industry at a
rate of 2.5-3% per year up to 2015, which equates to an additional
90,000-120,000 workers per year.
This is dealt with in more detail in the Laying
Foundations report (http://www.london.gov.uk/mayor/economic_unit/docs/layingfoundations.pdf).
Having looked at London's construction industry and workforce,
we now turn to London's capacity to construct.
DELIVERY OF
LONDON'S
INVESTMENT IN
INFRASTRUCTURE
28. The GLA is confident that the construction
industry can deliver all the infrastructure projects planned for
London over the next decade or so. Within a year, one of Europe's
largest construction projects, Heathrow's Terminal 5, will be
complete and free up resources for the construction of Crossrail
and Olympic developments planned thereafter.
— The OGC (Office for Government Commerce)
Construction Demand/Capacity Report (2006) report indicates
that no significant constraints are expected and the industry
has always traditionally been able to adjust to meet demand.
— The NERA Capacity and Availability
of the Supply Market for Implementation of Crossrail Phase 1 (2004)
report indicates that the Crossrail scheme would face some capacity
issues, but these would be in some of the specialist trades and
professional disciplines.
Crossrail
29. Crossrail would be one of the largest
infrastructure project ever undertaken in the UK and in its peak
year absorb more than 20% of total resources assigned to new UK
infrastructure construction. There are some indications however
that other major tunnelling projects will end as Crossrail starts,
which will release resources. Professor Robert Mair, Professor
of Geotechnical Engineering, Cambridge University has recently
shared the following insight "a boom in UK tunnelling may
well coincide with a slow down in places like Singapore, Japan
or Hong Kong, which will lead to a natural migration of resources
to the UK".
30. There will be some tunnelling schemes
aside from Crossrail but the schemes are relatively small in comparison.
Crossrail's demands for signalling and track resources will account
for only about 10% and 7% of total national railway industry resources
of these types over the Crossrail construction period.
31. The Channel Tunnel Rail Link provides
a recent example of when anticipated shortages in tunnelling and
diaphragm walling did not materialise.
32. According to NERA, construction of the
Olympic facilities, including some transport facilities, will
be well under way once construction of Crossrail is started. But
in the period up to 2012 when the Games are held, Crossrail expenditure
will be below its peak with relatively little competition for
the resources used in tunnelling and trackwork. Furthermore, the
specific skills required in tunnelling necessarily come from internationally
mobile labour. Crossrail's main requirements for "general
building trades" (ie not tunnelling) will not occur until
Olympic construction is finished.
33. There is a range of other construction
projects planned in the London region, though these will pose
less severe demands on Crossrail resources. Such projects include
major motorway widening, the Thames Gateway Bridge, and major
commercial building development.
Olympics
34. According to Franklin and Andrews 2012
Bulletin—Economic Impact of the Olympic and Paralympic Games
(2005) in order to build the games in 2012, the building sector
needs to increase output by only 15% per annum, a figure that
should be easily absorbed by the market.
35. Although there will be an impact on
the building sector, the majority of pressure will be felt in
infrastructure where key skills are likely to be stretched.
36. There have been a number of estimates
of the specific impact of the Olympics on construction costs,
in the order of 1 to 2% per annum additional cost increases. But
these estimates are unlikely to reflect actual construction cost
figures rather than the original estimates, so they are likely
to underestimate the effect of the London Olympics on construction
prices in London over the Olympic build period up to 2012 (NERA
2007).
December 2007
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