Impact of Brexit on infrastructure, mining and commodities

Will the UK’s waste policy change?
How will the regime for production quotas and subsidies in the UK change when the Common Agricultural Policy (CAP) no longer applies?
What other changes may the UK’s agri-food industry face post-Brexit?
What impact will Brexit have on the public sector in relation to UK infrastructure projects?
What will be the impact of withdrawal of Juncker Plan funding for UK infrastructure projects?
Will UK companies be treated differently in the procurement of EU infrastructure projects when the UK leaves the EU?
What will be the impact on the UK's construction industry and engineering sectors?

Will  the UK’s waste policy change?

Much of the UK’s current waste policy is derived from the EU Waste Framework Directive. This policy sets a common definition of waste and aims to ensure it is recovered or disposed of responsibly through permitting, registration and inspection requirements. It has been a key driver for the waste management and recycling industries in the UK and has led to the reduction of landfill, change in consumer behaviour and the development of energy from waste plants.

Although in the UK there is a clear momentum towards greater levels of recycling and reduced dependence on landfill, there is still a high level of uncertainty as to the impact Brexit will have on the UK’s waste and recycling policies. The government’s 25-Year Environment Plan, released in January 2018, promises to deliver a ‘Green Brexit’ but questions remain as to whether co-operation between the UK and EU will continue.

The introduction of new trade barriers between the UK and EU may increase the cost and difficulty of trading in waste. Such barriers could result in storage difficulties due to border control delays, an increase in waste crime and more waste ending up in landfill sites. The government’s plans for waste and recycling policies after Brexit may also be undermined by lack of funding at the Department for Environment, Food & Rural Affairs (Defra), which receives a substantial amount of funding from the EU for such policies.

It is unlikely that Brexit, in any form, will lead to significant change to the UK’s waste and recycling policies. There are very few positive messages central government could make for moving significantly away from EU targets in such areas without impacting on other environmental policies. Any change to the UK’s waste policy will, in any event, take many years to agree and implement.

However there might be greater pressure from local authorities to move away from the objectives set by the EU Landfill Directive; to reduce the landfilling of waste by introducing stringent technical requirements for waste and landfills. These EU driven targets have caused local councils to incur large fines for missing the landfill reduction levels. These fines get carried across into council tax bills.

Many local councils are already committed to long term waste management contracts, whether through PPP or other forms of outsourcing, which require the waste company to meet recycling and/or landfill reduction targets driven by the EU Directive. Any change to those targets after Brexit will not have an immediate impact on those long term contracts without renegotiation.

How will the regime for production quotas and subsidies in the UK change when the Common Agricultural Policy (CAP) no longer applies?

Set up in 1957, the CAP provides support to some 12 million farmers across Europe. EU agricultural and environmental subsidies currently account for a significant portion of the income of UK farmers, through access to direct payments (Basic Payment Scheme) and funding given to the UK for rural development projects.

Post-Brexit, these subsidies will no longer be available to UK farmers. The UK, post-Brexit and post-transition, will be operating outside of the CAP and the House of Commons briefing paper - ‘Brexit: Future UK Agriculture policy’ published in February 2018 - provides further clarity regarding how the UK plans to diverge from the CAP. According to the UK government’s 25-Year Environment Plan released in January 2018, current direct payments to farmers in England will be replaced by a new environmental land management system based on providing public money for public goods; with an emphasis on environmental enhancement, but also public access and rural resilience. The briefing paper indicates that there will be a five-year transitional period from farming subsidies to a system of public money for public goods; during which time a maximum cap may be implemented to reduce the largest direct payments or we may see a sliding scale of reductions. It has also indicated that direct subsidies for 2019 will be paid as normal. Uncertainty in the industry may deter farmers from making long-term improvements and investment decisions and therefore, farming unions across the UK have largely supported the government’s proposal for a transition period of around five years for a move to a new farm support system.

Given the strategic importance of agribusiness in the UK and the UK’s significant food-processing industry which relies on raw agricultural product, as well as the fact that CAP support makes up around 50-60 per cent of farm incomes in England and a larger proportion in other parts of the UK, not surprisingly, there is concern. However, withdrawal from such policy may create an opportunity to build a more efficient and innovative farming sector tailored to UK priorities and farming systems.

What other changes may the UK’s agri-food industry face post-Brexit?

Trade

Trade is vital to the agri-food industry – the EU being the UK’s largest trading partner in agri-food products accounting for around 60 per cent of exports and around 70 per cent of imports. As part of the EU, the UK benefits from the ‘single market’ (with free movement of goods around the EU) and a customs union (with tariffs on non-EU products set through either preferential trade agreements with other countries or through the World Trade Organisation).

The government’s policy is that the UK should cease to be a full member of both the single market and the customs union; instead the intention is to pursue a Free Trade Agreement (FTA) with the EU. World Trade Organisation (WTO) rules would automatically apply to any trade between the UK and the EU if an FTA is not realised in the time available before any transitional arrangement between the UK and EU expires, or if no such arrangement is agreed. Under such WTO rules, tariffs on agricultural goods are typically high – the intention being the protection of domestic markets.

Without preferential access to the European market, both UK exports and imports will potentially be subject to tariff barriers. The average charge imposed by the EU on agricultural produce not granted preferential access to the European market is 12.2 per cent, but this rises for some meat products to 67 per cent. Therefore, it is important that the UK secures fair, bilateral trade agreements with the EU.

Access to labour

A serious labour shortage may face the sector once EU rules on freedom of movement cease to apply. Significant numbers of migrant workers are used in the agriculture and food processing sector, with an estimated 75,000 temporary migrant workers in agriculture every summer in the UK. This access to labour is essential as it underpins the UK food chain’s timely delivery of high quality affordable food to consumers.

The UK government is seeking to secure a flexible migration policy and are keen to ensure that post-Brexit there is access to seasonal agricultural labour. Any restrictions on the free movement of labour as a result of Brexit will have a huge impact on the UK’s agri-food industry.

The government has commissioned the Migration Advisory Committee (MAC) to assess the impact of leaving the EU on both seasonal and non-seasonal employment – this report is due in 2018.

What impact will Brexit have on the public sector in relation to UK infrastructure projects?

Irrespective of the nature of the relationship which will emerge between the UK and the EU post-Brexit, we envisage that the UK public sector will remain subject to some form of public procurement regulation on the grounds that international trade rules (including the GPA) tend to operate on the basis of reciprocal treatment. (Please also see question 5 of the Antitrust and Competition section.) Given the importance of “value for money” considerations for the UK public sector, we envisage that contracting authorities are likely to encourage a competitive tender process for any infrastructure project so as to open up the pool of potential bidders.

In relation to state aid law – which regulates how public money can be put towards commercial activities, including infrastructure projects – the UK Government has confirmed that it will transpose the existing EU regime, including exemptions, into domestic law. The Competition and Market Authority will take the place of the European Commission as the state aid oversight and enforcement body in this jurisdiction. Whilst the intention is to transpose the regime as it is, there may be scope for the substantive rules of state aid law to diverge over time from the EU position, but the extent to which this will be possible may be restricted by the terms of a future UK-EU FTA.

What will be the impact of withdrawal of Juncker Plan funding for UK infrastructure projects?

The so-called ‘Juncker Plan’ (or European Fund for Strategic Investment (EFSI)) is an investment plan aimed at unlocking €315bn of investment over three years in strategic projects across the EU.

It is likely that Brexit will result in a withdrawal or reduction of the UK’s co-financing of the EFSI and investment by the EFSI in UK projects, and there will now be a period of adjustment and uncertainty for parties who have already received, or are about to receive, funding. President of the European Investment Bank (EIB), Werner Hoyer, insisted that lending to the UK would continue while the UK remains a shareholder and a member, but it seems likely the amount of lending will fall.

Should any planned investment under the Juncker Plan be withdrawn, the UK would face the challenge of securing alternative funding for these strategic projects.

Will UK companies be treated differently in the procurement of EU infrastructure projects when the UK leaves the EU?

Post-Brexit, UK companies’ freedom to participate in tender processes for infrastructure projects conducted by public bodies in EU and EEA countries will be determined by the nature of the relationship which emerges between the UK and the EU.

Our expectation is that UK companies will retain the right to tender for such projects, either under the terms of a future bilateral free trade agreement (FTA) between the UK and the EU or under the terms of the WTO’s Government Procurement Agreement (GPA). A UK-EU FTA will almost certainly deal with the procurement of public contracts in either jurisdiction and it can be expected that such an agreement will guarantee market access on a reciprocal basis. It is less certain to what extent (if any) such an agreement might allow the UK to diverge from the EU’s substantive procurement law and how disputes between the parties might be handled. Alternatively, accession to the GPA would allow UK contractors to continue to access the procurement markets of GPA parties, which includes the EU as well as a number of other major economies such as the US, Canada, Switzerland and Japan. However, it is questionable whether GPA accession can be negotiated before the UK leaves the EU as the UK must first regularise its position within the WTO and then negotiate GPA accession terms with each of the existing parties.

It is possible that, even in the absence of a UK-EU FTA or UK accession to the GPA, UK businesses may be able to circumvent barriers in tendering for EU infrastructure projects through ownership of, or partnering with, a local company. However, this is by no means certain as EU negotiators have indicated that they might not allow such backdoor arrangements.

What will be the impact on the UK's construction industry and engineering sectors?

In the short term, any uncertainty as to the exact form and nature of Britain’s relationship with the EU (both on Saturday 30th March 2019 and at the end of the transitional phase) will have an adverse impact on foreign direct investment into the UK, particularly in relation to real estate development and the built environment. Until the finer detail of Brexit is known, the uncertainty is likely to put investment decisions on hold and result in fewer deals in the pipeline.

In the medium term, any restriction on the ability of nationals from other EU countries to work in the UK will have a significant impact across the industry and its various sectors. Construction accounts for approximately 6 per cent of UK GDP and approximately 9 per cent of the UK workforce is engaged in construction and engineering – and 8 per cent of that workforce alone comes from the EU, working both in professional roles across the sectors as well as on building sites. Until the UK has developed new domestic talent pipelines (in the forms of training and apprenticeships) and has new work permit rules and arrangements in place, a shortage of workers and skills is inevitable and it could result in increased project costs where demand for labour outstrips supply. This will be particularly relevant to mega-projects such as HS2 and the nuclear new build programme. Of concern is the failure of the UK government to add construction workers to the UK shortage occupation list, which prioritises certain sectors during the visa application process.

In addition, the value of construction imports into the UK is now more than double the value of exports, with the trade deficit in construction materials and components continuing to widen. Currency fluctuations are likely to make the purchase of goods and materials more expensive and drive up project costs. In the longer term, the terms of trade agreements concluded post-Brexit will also impact upon project costs generally.

Brexit clearly imposes challenges to construction and engineering - but it also heralds the dawn of an opportunity to accelerate much needed change. When input costs increase, we often see new and innovative delivery methods emerging. Looking ahead, it is clear that technology will have an even greater effect across the industry; human-free construction sites are now a little more than a generation away. Now is the time to look at procurement methods and contracts and ensure they are future ready.

Much of the UK’s current waste policy is derived from the EU Waste Framework Directive. This policy sets a common definition of waste and aims to ensure it is recovered or disposed of responsibly through permitting, registration and inspection requirements. It has been a key driver for the waste management and recycling industries in the UK and has led to the reduction of landfill, change in consumer behaviour and the development of energy from waste plants.

Although in the UK there is a clear momentum towards greater levels of recycling and reduced dependence on landfill, there is still a high level of uncertainty as to the impact Brexit will have on the UK’s waste and recycling policies. In its White Paper on Brexit published in July 2018, the government made clear that it intends to maintain high environmental standards once the UK exits the EU. The government’s 25-Year Environment Plan, which promises to deliver a ‘Green Brexit’, sets out the scale of its future ambitions.

The introduction of new trade barriers between the UK and EU may increase the cost and difficulty of trading in waste. Such barriers could result in storage difficulties due to border control delays, an increase in waste crime and more waste ending up in landfill sites. The government’s plans for waste and recycling policies after Brexit may also be undermined by lack of funding at the Department for Environment, Food & Rural Affairs (Defra), which receives a substantial amount of funding from the EU for such policies. The UK will leave the EU budget and receive no further funding if the UK leaves the EU in March 2019 without agreement on these issues.

It is unlikely that Brexit, in any form, will lead to significant change to the UK’s waste and recycling policies. There are very few positive messages central government could make for moving significantly away from EU targets in such areas without impacting on other environmental policies. Any change to the UK’s waste policy will, in any event, take many years to agree and implement.

However there might be greater pressure from local authorities to move away from the objectives set by the EU Landfill Directive; to reduce the landfilling of waste by introducing stringent technical requirements for waste and landfills. These EU driven targets have caused local councils to incur large fines for missing the landfill reduction levels. These fines get carried across into council tax bills.

Many local councils are already committed to long term waste management contracts, whether through PPP or other forms of outsourcing, which require the waste company to meet recycling and/or landfill reduction targets driven by the EU Directive. Any change to those targets after Brexit will not have an immediate impact on those long term contracts without renegotiation.

Set up in 1957, the CAP provides support to some 12 million farmers across Europe. EU agricultural and environmental subsidies currently account for a significant portion of the income of UK farmers, through access to direct payments (Basic Payment Scheme) and funding given to the UK for rural development projects.

Post-Brexit, these subsidies will no longer be available to UK farmers. The UK, post-Brexit and post-transition, will be operating outside of the CAP and the House of Commons briefing paper - “Brexit: Future UK Agriculture policy” published in February 2018 - provides further clarity regarding how the UK plans to diverge from the CAP. According to the UK government’s 25 Year Environment Plan released in January 2018, current direct payments to farmers in England will be replaced by a new environmental land management system based on providing “public money for public goods” – rewarding farmers’ work in enhancing the environment and investing in sustainable food production. As indicated by the briefing paper, there will be a five-year transitional period from farming subsidies to a system of public money for public goods, which farming unions have largely supported. The benefits of environmental land management schemes are detailed in Defra’s Future Farming and Environment Evidence Compendium, published in February 2018.

In its advice notices for the farming industry published in August 2018 (see here and here), the government specified that in the unlikely event in which the UK leaves the EU without agreement (in a “no deal” scenario) eligible beneficiaries will continue to receive payments until domestic legislation, set to govern the UK’s agriculture industry, is introduced by Defra and devolved administrations. Funds for farm support (including both Pillar 1 and 2 of the current CAP) will mirror that currently provided by the EU until the end of the current parliament (expected in 2022). For projects agreed before the end of 2020, regardless of whether the UK leaves the EU without agreement, funding is guaranteed for their full lifetime. This means new projects signed after the scheduled leave date in March 2019 will also receive funding up to the value of programme allocations. For more information, see our blog post on Inside Brexit.

Given the strategic importance of agribusiness in the UK and the UK’s significant food-processing industry which relies on raw agricultural product, as well as the fact that CAP support makes up around 50-60 per cent. of farm incomes in England and a larger proportion in other parts of the UK, not surprisingly, there is concern, which may deter farmers from making long-term improvements and investment decisions. However, withdrawal from such policy may create an opportunity to build a more efficient and innovative farming sector tailored to UK priorities and farming systems.

Trade

Trade is vital to the agri-food industry – the EU being the UK’s largest trading partner in agri-food products accounting for around 60 per cent. of exports and around 70 per cent. of imports. As part of the EU, the UK benefits from the ‘single market’ (with free movement of goods around the EU) and a customs union (with tariffs on non-EU products set through either preferential trade agreements with other countries or through the World Trade Organisation).

The government’s policy is that the UK should cease to be a full member of both the single market and the customs union; instead the intention is to pursue a Free Trade Agreement (FTA) with the EU as stated in the White Paper on Brexit. World Trade Organisation (WTO) rules would automatically apply to any trade between the UK and the EU if an FTA is not realised in the time available before any transitional arrangement between the UK and EU expires, or if no such arrangement is agreed. In a ‘no deal’ scenario, businesses exporting and importing goods to and from the EU will be required to apply the same excise rules to goods moving between the UK and a country outside of the EU, meaning an import declaration will be required and customs duties must be paid. For further information on the impact of businesses trading with the EU, see the government advice notices on importing and exporting.

Without preferential access to the European market, both UK exports and imports will potentially be subject to tariff barriers. The average charge imposed by the EU on agricultural produce not granted preferential access to the European market is 12.2 per cent., but this rises for some meat products to 67 per cent.. Under WTO rules, tariffs on agricultural goods are typically high – the intention being the protection of domestic markets. Therefore, it is important that the UK secures fair, bilateral trade agreements with the EU.

Access to labour

A serious labour shortage may face the sector once EU rules on freedom of movement cease to apply. Significant numbers of migrant workers are used in the agriculture and food processing sector, with an estimated 75,000 temporary migrant workers in agriculture every summer in the UK. This access to labour is essential as it underpins the UK food chain’s timely delivery of high quality affordable food to consumers.

The UK government is seeking to secure a flexible migration policy and are keen to ensure that post-Brexit there is access to seasonal agricultural labour. Any restrictions on the free movement of labour as a result of Brexit will have a huge impact on the UK’s agri-food industry.

The government has commissioned the Migration Advisory Committee (MAC) to assess the impact of leaving the EU on both seasonal and non-seasonal employment – this report is due in 2018.

Irrespective of the nature of the relationship which will emerge between the UK and the EU post-Brexit, we envisage that the UK public sector will remain subject to some form of public procurement regulation on the grounds that international trade rules (including the GPA) tend to operate on the basis of reciprocal treatment. (Please also see question 5 of the Antitrust and Competition section.) Given the importance of “value for money” considerations for the UK public sector, we envisage that contracting authorities are likely to encourage a competitive tender process for any infrastructure project so as to open up the pool of potential bidders.

In relation to state aid law – which regulates how public money can be put towards commercial activities, including infrastructure projects – the government has confirmed that it will transpose the existing EU regime, including exemptions, into domestic law (see the government advice notice on state aid). The Competition and Market Authority will take the place of the European Commission as the state aid oversight and enforcement body in this jurisdiction. Whilst the intention is to transpose the regime as it is, there may be scope for the substantive rules of state aid law to diverge over time from the EU position, but the extent to which this will be possible may be restricted by the terms of a future UK-EU FTA.

The so-called “Juncker Plan” (or European Fund for Strategic Investment (EFSI)) is an investment plan aimed at unlocking EUR 315bn of investment over three years in strategic projects across the EU.

It is likely that Brexit will result in a withdrawal or reduction of the UK’s co-financing of the EFSI and investment by the EFSI in UK projects, and there will now be a period of adjustment and uncertainty for parties who have already received, or are about to receive, funding. President of the European Investment Bank (EIB), Werner Hoyer, insisted that lending to the UK would continue while the UK remains a shareholder and a member, but it seems likely the amount of lending will fall. For more information on EIB funding, see our blog post What does Brexit mean for the funding of UK infrastructure projects by the European Investment Bank?. Should any planned investment under the Juncker Plan be withdrawn, the UK would face the challenge of securing alternative funding for these strategic projects.

Post-Brexit, UK companies’ freedom to participate in tender processes for infrastructure projects conducted by public bodies in EU and EEA countries will be determined by the nature of the relationship which emerges between the UK and the EU.

Our expectation is that UK companies will retain the right to tender for such projects, either under the terms of a future bilateral free trade agreement (FTA) between the UK and the EU or under the terms of the WTO’s Government Procurement Agreement (GPA). A UK-EU FTA will almost certainly deal with the procurement of public contracts in either jurisdiction and it can be expected that such an agreement will guarantee market access on a reciprocal basis. It is less certain to what extent (if any) such an agreement might allow the UK to diverge from the EU’s substantive procurement law and how disputes between the parties might be handled. Alternatively, accession to the GPA would allow UK contractors to continue to access the procurement markets of GPA parties, which includes the EU as well as a number of other major economies such as the US, Canada, Switzerland and Japan. In its White Paper on Brexit, the government proposed that the UK plays a full and prominent role in the multilateral and plurilateral trade agenda as a member of the GPA in its own right. However, it is questionable whether GPA accession can be negotiated before the UK leaves the EU as the UK must first regularise its position within the WTO and then negotiate GPA accession terms with each of the existing parties.

It is possible that, even in the absence of a UK-EU FTA or UK accession to the GPA, UK businesses may be able to circumvent barriers in tendering for EU infrastructure projects through ownership of, or partnering with, a local company. However, this is by no means certain as EU negotiators have indicated that they might not allow such backdoor arrangements.

In the short term, any uncertainty as to the exact form and nature of Britain’s relationship with the EU (both on 30 March 2019 and at the end of any transitional phase) will have an adverse impact on foreign direct investment into the UK, particularly in relation to real estate development and the built environment. Until the finer detail of Brexit is known, the uncertainty is likely to put investment decisions on hold and result in fewer deals in the pipeline.

In the medium term, any restriction on the ability of nationals from other EU countries to work in the UK will have a significant impact across the industry and its various sectors. Construction accounts for approximately 6 per cent of UK GDP and approximately 9 per cent of the UK workforce is engaged in construction and engineering – and 8 per cent. of that workforce alone comes from the EU, working both in professional roles across the sectors as well as on building sites. Until the UK has developed new domestic talent pipelines (in the forms of training and apprenticeships) and has new work permit rules and arrangements in place, a shortage of workers and skills is inevitable and it could result in increased project costs where demand for labour outstrips supply. This will be particularly relevant to mega-projects such as HS2 and the nuclear new build programme. Of concern is the failure of the UK government to add construction workers to the UK shortage occupation list, which prioritises certain sectors during the visa application process.

In addition, the value of construction imports into the UK is now more than double the value of exports, with the trade deficit in construction materials and components continuing to widen. Currency fluctuations are likely to make the purchase of goods and materials more expensive and drive up project costs. In the longer term, the terms of trade agreements concluded post-Brexit will also impact upon project costs generally.

Brexit clearly imposes challenges to construction and engineering - but it also heralds the dawn of an opportunity to accelerate much needed change. When input costs increase, we often see new and innovative delivery methods emerging. Looking ahead, it is clear that technology will have an even greater effect across the industry; human-free construction sites are now a little more than a generation away. Now is the time to look at procurement methods and contracts and ensure they are future ready.