***post written before October 31st*** 

Another updated Brexit perspective post upcoming…

The impact of Brexit on all sectors of the UK economy, particularly in the short term, will depend to an extent on whether the exit deal agreed between the UK and the EU goes ahead as planned, on October 31st 2019. Areas in which Brexit is likely to impact upon the data centre sector and the construction industry include the continuity of data flows, investment, skills shortage and import/export arrangements, including the cost of construction materials and levels of red tape.

Parliament rejected Theresa May’s previously proposed Withdrawal Agreement; an agreement which meant existing arrangements for trade, customs, data protection, procurement and employment rights would continue during the transition period. Boris Johnson’s revised deal remains largely unchanged from May’s although it boasts new customs arrangements for the UK. A no-deal Brexit would likely be more disruptive than either Johnson’s or May’s proposed deals.

 

Data flows

The UK needs to be regarded as a safe place for EU citizens’ data to be stored and accessed after Brexit. As an EU member, the UK currently adheres to the General Data Protection Regulation (GDPR) and continued compliance with the requirements of the GDPR is fundamental to maintaining confidence in the UK data centre sector after Brexit.

The government has stated that UK data protection regulations will remain unchanged after Brexit, with the GDPR being incorporated into UK law to sit along the existing UK legislation, the Data Protection Act 2018.

However, in the event of a no-deal Brexit the UK would become subject to the EU’s existing mechanism governing data flow between the EU and non-EU countries, i.e. an adequacy decision. The UK government appears confident that an adequacy decision would be granted to the UK, given the continued adherence to the requirements of the GDPR. However, the EU has stated that a decision on adequacy cannot be made until after the UK has exited.

If the EU does not make an adequacy decision at the point of the UK’s exit, alternative legal terms will have to be agreed. For the majority of organisations, the most relevant legal basis would be standard contractual clauses, i.e. the model data protection clauses that have been approved by the European Commission. The government recommends that UK data controllers proactively consider what action they may need to take in order to ensure continued free flow of data with their EU partners.

The government’s advice on data protection in the event of a no-deal Brexit can be found here:

https://www.gov.uk/guidance/using-personal-data-after-brexit#what-you-need-to-do-before-a-no-deal-brexit

 

Investment

There is the possibility that some organisations or sectors may relocate their operations to the EU, particularly if Johnson’s new deal Brexit creates obstacles to the free flow of trade (or data) between the EU and the UK. A number of the UK’s neighbours, such as Ireland and Iceland, are actively seeking to position themselves as alternative data centre market providers to the UK in anticipation of this.

However, it has been suggested by industry commentators that the UK’s strength in the colocation market may help to insulate its data centre sector post-Brexit. It has been argued that the colocation market is likely to remain strong, as most organisations have not yet put all their resources into the cloud and therefore want to retain their resources locally, so IT staff can check on the status of their hardware. While there may be wholesale colocation customers who are large enough and mobile enough to move out of the UK after Brexit, it seems that there are enough smaller organisations with local colocation needs to fill all the space the sector can build. If this is the case, investment in UK data centre provision is likely to remain robust.

 

Skills shortage

The construction industry relies heavily on foreign migrant labour for skilled and non-skilled roles. It is feared that once the UK is outside of the EU and the associated free movement ends, skills shortages could worsen. If immigration is limited, particularly for skilled workers, the UK could see higher project costs where labour demand outstrips supply.

This could have a knock-on effect on the capacity of housebuilders to meet the government’s housing targets, with cost increases possible for construction companies. This further decline in housebuilding could deepen the current housing crisis, particularly in London. Alternatively, if global investors start to take their money out of the UK property market, this could lead to a reduction in prices and free up investment properties that are currently sitting empty.

Under the Withdrawal Agreement, EU citizens in the UK will retain their right of residency after Brexit, although they will be required to apply through the EU Settlement Scheme. This right will extend to those entering the UK up to 31 December 2020 (the end of the proposed transition period).

After the expiry of the transition period, freedom of movement between the UK and the EU will end and a new UK immigration system will be introduced. Announced this month by the Home Secretary, Priti Patel, the government will implement an ‘Australian-style’ points-based immigration system (PBS) aimed at attracting skilled immigrants to the UK. A previous proposal set out in a government white paper released in late 2018 included removing the current cap on the number of skilled workers from the EU and elsewhere and a consultation on a minimum salary of £30,000 for skilled migrants seeking five-year visas. While the Australian-inspired PBS differs from this proposal, both systems share the implication that post-Brexit immigration policies – under the current Conservative government at least – would encourage an inflow of skilled workers to the UK.

These approaches are not without their critics. Mark Reynolds, chief executive of Mace, has criticised Theresa May over the government’s plans to focus post-Brexit immigration on high-skilled workers with no priority for those in the EU. May claimed that the free movement of workers between the UK and EU would end “once and for all”, while this month Patel repeated these words and claimed that her mission was to “end the free movement of people one and for all”.

The most high-profile construction industry figure to express views on the issue, Reynolds accused the government of completely ignoring industry worries over access to ‘unskilled’ labour after March 2019. Office of National Statistics (ONS) figures show that one-third of workers on construction sites in London were from overseas, with 28% coming from the EU.

Reynolds said; “The future of the UK’s construction and engineering sectors relies on the availability of both highly skilled specialists and so-called ‘low skilled’ labour. I believe that the policy should be urgently reviewed, and business consulted once again, as without access to the right mix of skills we will be unable to deliver sustainable construction growth after Brexit.”

Julia Evans, Chief Executive at BSRIA, said: “… members must be able to access skills and talent – at all levels – swiftly and easily when they can demonstrate that they haven’t been able to hire or train the staff they need here in the UK. This will halt more and more unnecessary and messy red tape and bureaucracy.”

 

Import and export of construction materials

As well as the free movement of people, EU membership allows for the free movement of goods within the EU, eliminating duties and other restrictions. A study by the Department for Business Skills and Innovation estimated that 64% of building materials were imported from the EU. The same report estimated that 63% of building materials were exported to the EU. After Brexit, importers and exporters may face duties or limits on quantities, which could potentially lead to a shortage of construction materials or an increase in costs.

Alternatively, Brexit could allow UK public procurement policies to stipulate the use of ‘UK firms and materials only’, thus supporting UK-based enterprises. This however may affect plant critical for data centres, as a majority is manufactured in the EU.

It is unclear whether Brexit may enable the UK government to impose tariffs on cheap steel imports from China that have led to the decline of the UK’s steel industry. Historically, UK governments have not been in favour of propping up industries in this way, and there is always the potential for retaliation from affected countries.

On the positive side, the UK may be able to negotiate and develop its own trade agreements with the EU and other large importing companies, such as China and the USA.

 

Red tape

The general perception is that Brexit could result in a removal of the extensive red tape mandated by the EU. However, it is important to note that Brexit will not result in the breaking of all ties between the UK and EU. Whatever model is adopted, it is almost certain that a condition of a trade agreement with the EU would be compliance with existing trading standards.

 

Infrastructure

As a member of the EU, the UK has access to the European Investment Bank (EIB) and the European Investment Fund (EIF). Together these institutions invested €7.8 billion in major infrastructure projects and lent €665 million to SMEs in 2015. Losing both these revenue streams could have a significant impact on the delivery of big infrastructure projects such as High-Speed 2 (HS2), as well as start-ups across the UK.

Whist this may be replaced by some of the money saved from EU membership, it seems unlikely in the face of ongoing cuts to government spending that this would be invested in infrastructure.

 

Energy

EU targets for progressively reducing greenhouse gas emissions up to 2050 have already been reflected in, for example, the UK Building Regulations. These require all building works to deliver improved energy performance and, where possible, promote the use of on-site renewable energy. Although Miguel Arias Cañete, the EU energy commissioner, wants the block to adopt more aggressive carbon reduction targets, this may be stalled by the interests of individual nations. However, with massive wind, wave and (fracked) gas potential, post-Brexit the UK may seek to take the lead in developing ‘clean energy’ technologies further, providing a source of employment and potential exports, as well as power.

 

Conclusion

The impact of Brexit on the construction and data centre industries – and all sectors of the UK economy – remains uncertain. With so little known about the terms of the agreement that the UK have eventually negotiated with the EU, it remains difficult to identify exactly what impact Brexit will have in the long term.

Depending on one’s viewpoint, Brexit may be regarded as a positive influence on what many have perceived as ongoing risks to the construction industry. Conversely, Brexit may turn out to be a major agent for disruptive change.

The most significant factor we believe will affect the industry will be the impact of Brexit on the price of materials and plant, with manufacturers using Brexit as an opportunity to raise prices (by anything from 5 to 20%). If this happens this will add to the cost of forthcoming infrastructure and other projects, both in the data centre world and the construction industry generally.