Thursday 27 February 2020
[Ms Karen Buck in the Chair]
School Admissions Process
I beg to move,
That this House has considered the effectiveness of the school admissions process.
It is a pleasure to serve under your chairmanship, Ms Buck—for the very first time, I believe.
I applied for today’s debate not only because the topic is of national importance, but because of the issues that my constituents have brought to me in recent weeks. Two weeks ago, the parents of one boy in my constituency came to me, beside themselves and at their wits’ end. To protect the identities of the child and the family, I will call the boy John.
John used to attend one of the schools in my constituency. He was on track, he played football and he learnt judo, but after his mock exams things went downhill and he started misbehaving. Eventually, he was sent to a pupil referral unit and excluded for three months. John’s father told me that during those three months, he essentially became another person: he was arrested and charged for robbery and he received a community service order.
John kept trying to turn his life back around and had a job for a year, but his parents saw him withdraw. It soon became clear that he was caught up with a bad crowd, with drugs and with gangs. In July last year, like other vulnerable children in Edmonton, he went missing. John was assaulted and only came back to his family four months later. He now faces another court case. His parents say that he stays in his room. They fear that his mental health is dwindling fast and that he might harm himself. John’s parents do not excuse the things he has done, but they love their child. They want him to be safe, and they wonder whether things could have been different had the school not excluded him so quickly.
Sadly, the story of John and his parents is not uncommon. It is being repeated all over the country, time and again. All across my constituency, parents know a simple truth: whether, how and where a child is admitted to school, and whether they are excluded from it, can set them on very different paths in life. In recent months, growing numbers of parents have come to me, saying how hard they are finding it to access decent school places in Enfield. Across the borough, we are losing too many vulnerable children to crime and gangs. Our pupil referral units and the wider education system are failing them.
The lives of those individuals affected are ultimately why today’s debate matters so much. I called for it because I know many hon. Members who are not here today but who, had they been able to attend, would have scrutinised with me the schools that this Government have built. The Government have now been in power for the past decade, and I hope that the Minister will back up his defence of their record with firm evidence.
Let us look at some of that evidence. Today, the Sutton Trust released an important new report assessing inequalities in the schools admission process, called “School Places: A Fair Choice?”. It finds high levels of socioeconomic segregation across schools and a marked gap in academic quality between schools attended by poor and by non-poor pupils. We often hear the argument that better-off parents are just more proactive about getting their children into good schools. The Sutton Trust research demonstrates that, in fact, parents across the socioeconomic spectrum make choices based on academic quality. The report found that those families eligible for free school meals make as many choices as richer families about the quality of school and about whether to choose a local school.
The report concludes that it is the school allocation system, rather than parental preferences, that means that children of wealthier families do better. In other words, inequalities in schools admissions exist because of how places are allocated, not because of how parents choose. The Government have based their whole education policy for the past decade on the mantra of promoting choice, but it turns out that it is the supply side of schooling, not the demand side, that is the problem.
On the supply side of school places, the arguments are well rehearsed. On this side of the House, the Labour party favours universal equal access and creating more high-quality places. We said in our last election manifesto that we would consider proposals for integrating private schools into a better state school system. We said that we would end the fragmentation and marketisation of our school system by bringing free schools and academies back under the control of the people who know them best—parents, teachers and local communities.
Let us be honest: parents feel there are not enough good places for children. According to the latest figures published this week by the Office of the Schools Adjudicator, the number of children being home-schooled in England has just risen by 13% to 60,000. The real number may be much higher. I ask the Minister whether the Government accept that in many parts of the country there are simply not enough high-quality school places available for parents to choose from, and what steps the Department is taking to correct that.
One simple change that would help to create a sufficiency of places would be for the Government to allow local authorities to build schools directly again. There is a lack of schools, the process now to create new schools is difficult and schools do not always get built in the right places. Local authorities, as admissions bodies, know where the schools are needed.
I thank my hon. Friend for that important point; I shall express my support for that later on in my speech.
The new research from the Sutton Trust also highlights the perverse incentives of school accountability systems that have developed under this Government. Both league tables and the Ofsted system encourage too many schools and academies to take on advantaged children and ignore disadvantaged children in the interests of scoring highly. I ask the Minister whether this new Government will look again at the incentives in our school accountability system.
The Sutton Trust has today made important and considered new proposals for making the schools admissions system fairer. They include marginal ballots, expanding the use of banding tests, prioritising applicants eligible for the pupil premium and simplifying conditions for demonstrating religious observance for applicants to religious schools. Will the Government say today what they make of those options, and will they commit to examining them closely?
The incentives that our Government set for schools matter, not just for admissions but for exclusions. The scandal of off-rolling, whereby schools still willingly exclude pupils too quickly just to improve their academic performance, is appalling. The Government must end it once and for all. Will the Minister consider making schools accountable for the outcomes of pupils who leave their rolls and removing the perverse incentives that let pupils such as my constituent John fall through the system?
I will conclude with a note of caution about the illusion of choice that the Government are giving people. Just this week, the schools admissions watchdog released figures in its annual report showing that in the past year, two out of every five complaints it received were about access to grammar schools—but those complaints were from privileged parents about grammar schools enrolling disadvantaged children. Any parent will know that people want the best for their child, but I am extremely concerned that the reintroduction of selective grammar schools under this Government is encouraging support for inequality. It is giving only an illusion of choice, and we need to ask ourselves whether it may be turning parents of advantaged children against disadvantaged families, who are being blamed for the lack of good school places.
I worry that the Government have introduced competition among parents without creating the new school places to go with it and are passing that off as “choice”. That is turning society against itself and dividing parents and communities. Should we not be putting all our efforts in this country into strengthening our whole public education system and creating high-quality new places, rather than encouraging a brutal race to the top for a lucky few while letting others, such as John, fall through the cracks? I look forward to hearing the Minister’s speech.
It is a pleasure to serve under your chairmanship, Ms Buck. We have something in common. I was recruited to the Labour movement in the mid-1980s by someone who I think was a great mentor to both of us—Alf Morris, who was the MP for Wythenshawe between 1964 and 1997. The reason I bring that up is that 2020 is the 50th anniversary of his seminal private Member’s Bill that became the Chronically Sick and Disabled Persons Act 1970, which was the first such legislation anywhere on the planet and has influenced legislators all over the world in recognising the rights of disabled people. I look forward later in the year to a calendar of events celebrating his great work. It is therefore a real pleasure to serve under you, Ms Buck.
I thank and congratulate my hon. Friend the Member for Edmonton (Kate Osamor) on securing the debate. She is an absolutely tremendous advocate for Edmonton and Enfield and she spoke with real passion and power about the situation of her constituent John. There is nothing more powerful than bringing the real-life lived experience of your constituents to the heart of democracy in Westminster, and she has done that with aplomb and passion today.
This has been an interesting-themed week. We had a very similar debate on exclusions yesterday, when a number of London MPs in particular were talking about how exclusions ruin the life chances of young people. They fall into criminal gangs and county lines behaviours and are lost to our system, for a number of reasons. It is interesting that we are back here today talking about admissions.
I have been badly impacted by the market-driven admissions system in my own constituency. Just today, the Secretary of State has backed a decision to close Newall Green High School in my constituency. I am absolutely outraged by that, having written to the Secretary of State and the Prospere Learning Trust; they together have made the decision to close the high school. I have stood shoulder to shoulder with both parents and pupils to try to maintain the viability of the school—not just recently, but over a number of years. It is short-sighted on the part of the Government. They have rejected sensible, pragmatic proposals from Manchester City Council, which wanted to keep the school open and was prepared to put substantial revenue into the project. The city council has not had the courtesy of a response from the Secretary of State. My hon. Friend the Member for Leeds North West (Alex Sobel) talked eloquently about this issue in his intervention: why are councils so driven away from the schools process? They are responsible for spatial frameworks, responsible for admissions to a degree and responsible for the welfare of every child, but we do not seem to think that they are fit to be part of the school system. I will continue campaigning against the unjust decision in my constituency.
Schools matter. Pupils’ academic outcomes are heavily influenced by the school that they attend. Academic achievement in turn strongly influences life chances. The effectiveness of the school that a student attends can have lifelong implications. All state-funded schools in England are subject to the school admissions code. Schools and local authorities must follow the statutory guidance when carrying out duties relating to school admissions. That should mean that all school admission policies are fair and transparent, but that is often not the case, as has been pointed out today. Some schools act as their own admissions authority and so set their own criteria, subject to the code. Voluntary-aided and foundation schools have been able to do that for some time, but the rapid expansion of academies under this Government means that thousands of schools can now determine their own admissions policy.
The problems are obvious. First, there is no single body responsible for ensuring that admission policies comply with the code. Secondly, schools can engage in back-door selection. On paper the admissions policy looks compliant; in practice a school may be unlawfully selecting or rejecting certain pupils. Schools may do that because they believe that certain pupils might adversely impact on their academic results and hence their position in the school league tables, with knock-on impacts on their Ofsted results. That was a key argument yesterday when we talked about school exclusions. Tens of thousands of young people are off-rolled annually from our schools. In fact, evidence from the Education Policy Institute that I cited yesterday showed that 69,000 young people were excluded from school in 2017 alone. We do not know the reasons why. My hon. Friend the Member for Edmonton makes the point that schools should be responsible, even when children are off-rolled or excluded, for their future welfare. That has been clearly stated in our party policy, but has the support of many hon. Members on both sides of the House.
Selective admissions such as those I have described result in discrimination against certain categories of pupils, including those with special educational needs and disabilities, those with English as an additional language and those from disadvantaged backgrounds. Children from disadvantaged families attend schools that have a much lower proportion of children achieving the benchmark of at least good grades at GCSE. The average score for that cohort was 59%. That is 6.9 percentage points below the cohort of non-poor pupils. It is a substantial difference.
My hon. Friend referred to the research in a Sutton Trust report released today. It states that half of all secondary school headteachers say that social segregation is a problem in state schools, yet more than 40% of them do not consider the socioeconomic make-up of their communities when developing their admissions policies. When children are allocated to schools that are over-subscribed—higher performing schools—the criteria that they use often favour the wealthy. We have a system in which whoever can afford to live near the good school has a much higher chance of getting in. That results in high levels of socioeconomic segregation across our school estate.
I welcome the second report that the Sutton Trust has published, which makes several detailed and considered proposals for dealing with the injustices of our current system. It shows that there is clear support for a review of admission policy, which would be overseen most effectively by local authorities. Through that approach, a level of coherence, fairness and trust could be restored to how we provide for our young people locally in their schools.
I will finish by asking the Minister to now look again at school admissions policies and address the segregation to enable a more mixed and balanced student population in our schools and to truly level the playing field for our nations’ young people.
It is a pleasure to serve under your chairmanship, Ms Buck. I congratulate the hon. Member for Edmonton (Kate Osamor) on securing the debate and on her excellent opening speech.
I listened carefully to what she had to say, and she said that there are not enough high-quality school places in our system. I have to say to her that we have raised the proportion of schools graded by Ofsted as good or outstanding from just 68% in 2010 to 86% today, and in the period between May 2010 and May 2018 we created 920,000 more places in our school system. We have also changed the admissions code to allow schools to prioritise in their admissions arrangements, their over-subscription criteria, children who are eligible for free school meals, those who qualify for the pupil premium, so there are incentives on schools to actively seek children from disadvantaged backgrounds. That is particularly the case with the pupil premium. It pays £935 per pupil in a secondary school and £1,320 per pupil in a primary school. And of course in the national funding formula we allocated significant sums to children from disadvantaged backgrounds.
In relation to the school admissions system, only about 1% of schools are referred to the Office of the Schools Adjudicator, which administers the school admissions system to ensure that they are fair. Anyone can object, if they think the admissions arrangements are unfair, but only 1% of schools are referred to the Office of the Schools Adjudicator. In her annual report, Shan Scott, the chief schools adjudicator, said that it was
“an admissions system that as a whole works effectively in the normal admissions rounds and that in those rounds the needs of vulnerable children and those with particular educational or social needs are generally well met.”
We are concerned about children in need who are known to social workers and seek their support. That is what our review of children in need was about. Our forthcoming changes to the school admissions code focus on in-year admissions and the fair access protocols, to ensure that they work better for the most vulnerable children, including children who have been excluded.
Our system is producing more good school places, which has been the thrust of everything that we have done with our school reforms since 2010. The academies programme has been at the heart of this Government’s reforms. Today, over 50% of pupils in state-funded education study in academies, the number of which has grown from 203 in 2010 to over 9,000 today. Our vision is for a world-class school-led system, which gives headteachers the freedom to run their schools in the way they know best. We believe that the academies programme can provide opportunities for that through its key principles: autonomy, accountability and collaboration. Therefore, we do not agree with Labour’s policy to bring academies under political control or with its hostility to the free schools programme.
Some 75% of sponsored primary and secondary academies that have been inspected are now good or outstanding. Those are sponsored academies, which are schools that have underperformed for years. Only one in 10 of those schools were judged good or outstanding before they became sponsored academies. Pupils at those schools are getting a significantly better quality of education thanks to that academies programme.
Through the free schools programme, this Government have funded thousands of good new school places and opened schools across the country, and we are committed to delivering choice, innovation and higher standards for parents. We want it to challenge the status quo and drive wider improvement, injecting fresh, evidence-based approaches into our education systems. Free schools are created to meet the need for pupil places in areas that need them and to address the concern about low- quality provision.
The Minister says that the Government are providing enough spaces for parents and their children. If there are enough spaces of high quality for all parents, why has the number of children in home schooling gone up by 13%?
We are also concerned about the increase in the number of children in elective home education. That is why we issued a call for evidence on home education and we are looking at it carefully. We have consulted on the proposal to create a register of children not in school. A range of factors have led to the increase, but in my judgment, it is not due to a shortage of high-quality school places in our school system.
As of 1 February, 508 free schools are open, providing 275,000 school places. In 2019, the top seven of the top 15 progress 8 scores for state-funded schools in England were achieved by free schools, and three of those schools were in the top five: Eden Boys’ School in Birmingham, Eden Girls’ School in Coventry and the Michaela Community School. Each of those successful schools teaches a stretching knowledge-rich curriculum, has a strong approach to behaviour management and is committed to high academic standards.
This morning I visited West London Free School, for the second or third time. It has an excellent quality of education and superb behaviour. I was hugely impressed by what I saw. There were very high quality lessons in music and arts. Over 80% of pupils there enter the EBacc combination of GCSEs. Eden Boys’ School and Eden Girls’ School were opened by Star Academies, which has grown through the free schools programme from running a single school in the north-west to running 28 schools across the country. Ark John Keats Academy is an outstanding open free school. In 2019 its progress 8 score was well above average at 0.76 and 82% of students entered the EBacc.
At Michaela Community School, 84% of pupils were entered for the EBacc, and in its first set of GCSE results, the school reported that more than half of all grades awarded were level 7 and above, which is equivalent to A and A*. That school serves a very disadvantaged community. The London Academy of Excellence is a free school sixth form in east London that was set up in collaboration with seven independent schools. In 2019, the school had an average A-level progress score well above average. It recently reported that 37 students received offers to study at Oxford and Cambridge. King’s College London Mathematics School is a specialist maths free school. In 2019, 100% of its pupils achieved an A or A*.
We are having a debate on admissions. I think the Minister has strayed some way off his brief. Perhaps his civil servants have given him the wrong speech today. Perhaps he could get back to addressing admissions.
Please stay on the topic of debate.
Thank you, Ms Buck. I was addressing the concern raised at the start that there are not enough high-quality school places, whereas we have been focused on creating more good school places, because that is a key part of our education reforms. However, I will adhere to your strictures, Ms Buck, and address the statutory duty to provide enough school places, which sits with local government. The Government provide basic need funding for every place that is needed based on the statistics supplied by the local authority. The local council of the hon. Member for Edmonton, the London Borough of Enfield, has been allocated £122.7 million to provide new school places between 2011 and 2021.
We have an effective admissions system to ensure that schools and parents are supported when school places are allocated. All mainstream state-funded schools, including academy schools, are required to comply with the school admissions code, which is designed to ensure that the practices and criteria used to decide the allocation of school places are clear, fair and objective. The code is clear that admissions authorities must ensure that their arrangements will not unfairly disadvantage, either directly or indirectly, a child from a particular social or racial group, or a child with a disability or special educational needs. It is for a school’s admission authority to set its own admission arrangements, provided that they are lawful. For community and voluntary control schools, the admission authority is the local authority; for foundation and voluntary-aided schools, it is the governing body; and for academies, it is the academy trust.
For normal admissions rounds, parents can apply to the local authority in which they live for places at their preferred schools. Parents can express a preference for at least three schools. If a school is undersubscribed, any parent who applies must be offered a place. When oversubscribed, a school’s admissions authority must rank applications in order against its published over-subscription criteria. Parents then receive a single offer of a place at the highest preference school that is able to offer their child a place. If a local authority is unable to offer a place at any of the parents’ preferred schools, it will offer a place at a suitable school. The latest report from the offers of the schools adjudicator, published on Monday, states that we do have an admissions system that works effectively in those normal rounds, as I have said earlier.
The latest preference data confirms that the admissions system is working well for most families. In 2019, 97.5% of applicants were offered one of their top three preferred primary schools and 93% of applicants were offered one of their top three preferred secondary schools. In the London Borough of Enfield, the hon. Lady’s local authority, 95.8% of applicants were offered one of their top three preferred primary schools and 85.5% were offered one of their top three preferred secondary schools in 2019.
We understand that where demand is high, parents cannot always secure a place at their preferred choice of school, but parents refused a place at a school for which they have applied have a right of appeal to an independent appeal panel. The schools admission authority is responsible for establishing that appeal panel, but the panel itself is an independent body. The admission authority has no control over its decisions. The appeal panel must come to its own conclusions.
I am grateful to the hon. Member for Edmonton for introducing the debate. It is timely, because next Monday will be national offer day, when thousands of parents up and down the country will hear what school their child will go to in September. We want all children to have fair access to a good school place, regardless of their background. Academies and free schools create a healthy choice for parents, while raising standards in education. The school admissions system, underpinned by the statutory school admissions code, supports the system effectively, providing the tools that schools need to allocate places in a fair and objective way.
The Minister did not answer all my questions. Is he prepared to receive a letter from me?
Or we could meet.
I appreciate that. It is a very important issue to my constituents. I am sure that I will speak to the Minister about admissions again.
Question put and agreed to.
That this House has considered the effectiveness of the school admissions process.
Construction Industry: Cash Retentions
[Steve McCabe in the Chair]
I beg to move,
That this House has considered the use of cash retentions in the construction industry.
It is a pleasure to serve under your chairmanship, Mr McCabe. We all know the procedure for Westminster Hall—you know it better than I do, Mr McCabe. I move the motion and, at the end, everybody agrees that this House has considered the matter. In this case, however, the subject matter has been considered several times, yet for some reason the Government choose to do nothing about it, which becomes ever more frustrating. Small companies continue to suffer cash-flow issues because of late payment by retention or, even worse, non-payment, often because of insolvency of the larger company.
I intend to focus on the lack of Government action, but I should first explain what a cash retention is. An October 2017 report by the Department for Business, Energy and Industrial Strategy and Pye Tait Consulting defined a cash retention as
“a sum of money withheld from the payments of a construction sector project in order to mitigate the risk that such projects are not completed…to the required quality standard.”
Effectively, a retention is a cash bond withheld by the main contractor to cover any snagging defects in an agreed maintenance period of one to two years, and is intended as a lever to hold subcontractors to their legal contractual obligements to make good any defects in a set timeframe. The typical value is 5% of the works, which can create significant cash-flow issues.
At any one time, it is estimated that in England alone, between £3 billion and £6 billion of retention money is withheld. There is a logic to the origin of cash retentions, however, as an insurance policy or bond to ensure that work is completed to the desired standard. Of course, at one time, the only way to operate contracts was the use of cash, so there is a historical logic.
I fully understand, having worked in the construction industry, that retaining half of the retention money until the works are initially completed, and then releasing it, is a good incentive to ensure that work is done without leaving odds and ends. I also realise that during the snagging period, it can be hard to get a subcontractor back on site immediately to rectify snagging issues, because they have moved on to other projects and their resources are allocated elsewhere.
On the whole, however, the subcontractor will always return to remedy defects at their own cost, as per the contractual terms and conditions. As the retention money is seldom required to pay for snagging issues, it is due to be paid to the subcontractor at the end of a defect period. That is when subcontractors expect the money owed to them to be released.
History also shows us problems with cash-based retentions. Too often and for various reasons, the retentions are not released in a timely manner, or even worse, are not released at all. The most common reason for non-release is a company going into liquidation, but if the subbies fully comply with the terms and conditions in their contracts, why should their money not be released in a timely manner? Why, in the 21st century, are we dealing with unprotected cash retentions?
The worst recent high-level example of the effects of lost retentions was the collapse of Carillion in January 2018. Estimates of lost cash for companies are in the region of £250 million to £500 million. Just think how many small and medium-sized companies went bust as a consequence? How many training opportunities were lost because of the resulting cash-flow issues? How many subcontractors just decided that enough was enough, packed up and got out of the game?
The knock-on effect is even worse than that. The great long chains of subcontractors mean that a company that was not even involved on the site may be dependent on getting payment, for a completely different project, from the company in liquidation. The ripple effect, which basically undermines the ecosystem of our construction industry, has been considerable over many years.
I fully agree with the right hon. Gentleman; that ripple effect can go all the way down to builders’ merchants and those who supply goods. It has a massive effect and we need the UK Government to do something about it.
I highlighted Carillion, and a further disparity is that for public sector contracts, for which tier 1 contractors are engaged, retention money is safe because the public sector will not go bust. Retention might cause tier 1 contractors some cash-flow issues, but their money is protected. In the case of Carillion, however, public sector clients will have retained Carillion’s retention money, which effectively included the subcontractors’ retention money. The subcontractors cannot get that money because they are legally creditors of Carillion. That shows an imbalance in the procurement process, because there is no regulation or guidance on how retention moneys are held or protected. If an employer enters into insolvency before the retention money is paid, the money is used to pay off creditors first—that is why changes are required.
In addition to the potential £500 million Carillion retention loss, the Specialist Engineering Contractors Group estimates that, in the last four years, £670 million of cash retentions has been lost to upstream insolvency, so for small and medium-sized enterprises, more than £1 billion has been lost in the system in that time. That highlights the need for Government action.
A micro-sized electrical business in the west of Scotland, which held a subcontract with Carillion, lost £40,000 in retention money when Carillion collapsed. Carillion’s client was the Ministry of Defence, which, ironically, did not hold retention money from Carillion. Carillion, however, took retention from the guys working for it. That subcontractor was lucky to survive, but could only do so by using reserves to plug the shortfall, cutting back on training, and cancelling plans to take on an apprentice. That single example shows the current imbalances in the procurement system and the impracticalities of using cash retentions.
The research paper “Retention in the Construction Industry”, published by BEIS and Pye Tait Consulting, found that 44% of the contractors surveyed had experience of retentions not being paid in the previous three years due to insolvency. In addition, 50% of contractors had their cash flow affected over the previous three years when their retentions were held, while they did not hold retention money themselves. Looking at the issue in the round, half of solvent contractors still suffer cash-flow issues because cash retentions are withheld. It should be noted that in more extreme cases, retention money is withheld for years. Why, in the face of such blatant evidence of those harmful effects, have the UK Government not taken action?
To illustrate the scale of the problem, the credit management company Creditsafe recently reported that 22 construction companies went bust in January 2020 alone. A further 158 firms were involved in varying stages of liquidation. Creditsafe predicts 4,000 construction insolvencies in 2020. That underlines the need for action.
Beyond the cash-flow issues, additional effects of withholding retentions include further insolvencies; job losses; cuts to training budgets and the inability to take on new apprentices; resources being wasted to chase up late payments, which leads to higher overheads for the company, an impact on productivity and unpaid hours for a non-chargeable activity; a possible inability for some companies to bid for other retention-based contracts or to expand because of cash-flow issues; and, if pressure bites, a desire to cut corners in other jobs to try to claw back money. Following the Grenfell tragedy, Dame Judith Hackitt’s “Building a Safer Future” report said
“Payment terms within contracts (for example, retentions) can drive poor behaviours, by putting financial strain into the supply chain. For example non-payment of invoices and consequent cash flow issues can cause subcontractors to substitute materials purely on price rather than value for money or suitability for purpose.”
There is of course a human element to this, because cash pressures bring personal stress. An industry survey before Christmas revealed that 90% of SME owners and senior managers were experiencing mental health issues, ranging from stress and anxiety to suicidal thoughts. Cash-flow issues clearly contribute to that stress.
Is there not an additional factor here? We have seen this: in any upsurge in demand, the construction industry has to go abroad for companies and skilled labour. The United Kingdom economy suffers a real loss in capacity, which impacts on private and public contracts, so the Government and in particular the Treasury should have a real interest in resolving this. Unfortunately, there does not seem to be much of a sense of urgency about solving it.
Again, I agree with the right hon. Gentleman’s intervention, and I thank him for it. Apart from the skills issue in the UK, it is another reason why we use labour from abroad, as he said. Also, we have relied on EU labour, but now the UK Government are ending free movement, so that will cause another issue and certainly underlines why we need to resolve the matter.
If the late release of retentions is such an issue, why do the sub-contractors not do something about it, such as adjudication or arbitration? They are caught between a rock and a hard place—they need their money, but they are often frightened to rock the boat, perhaps losing a vital pipeline of work from the contractor they are in arbitration with. That was the case for a local contractor in my constituency who approached me, as the MP, on the issue of cash retentions.
The processes also cost money in terms of resource time, often valuable resource. Therefore, it is not as easy a process for sub-contractors to follow as Ministers have suggested in the past. According to the recently published Government response to a consultation, the average cost borne by firms in adjudication over the past five years is £28,000, which is cost-prohibitive for small companies.
I congratulate the hon. Gentleman on securing this debate and on his superb speech. Brian Griffiths of Griffiths Air Conditioning in Burton Latimer wrote to me on exactly that point:
“When monies are held for long periods (often years), SMEs simply do not have the time, resources or legal skills to chase or recover, and have to take it as loss.”
Is Mr Griffiths not spot on?
He is absolutely spot on—I thank the hon. Gentleman for his intervention, which illustrates the point that I was making. For the record, I think it is the first time ever that he has said he is enjoying the speech I am making.
I stated that there is a historical logic to the origins of cash retentions, but there is no logic—and plenty of history—to UK Governments ignoring evidence and recommendations that time is up for the use of cash retentions. As long ago as 1964, the Banwell report, published through the Ministry of Public Building and Works, stated that:
“Where sensible methods of selecting contractors are used, the entire elimination of retention moneys could…be accomplished without any unreasonable risk”.
The report also suggested as an incentive that this
“might well lead to a reduction in tender prices.”
That possible carrot was not enough for the industry and the Government to take action.
A further 30 years down the line, in 1994, we had the Latham report. This was a joint construction industry and Government report that recommended that cash retentions should at least be protected in a trust account—recommendation 27 of the report. We have a tenancy deposit scheme to protect individuals in the private renting sector, and yet for some reason there has never been the will to do something with the deposits, in effect, in construction.
Why have delays continued for nearly another 30 years since the Latham report? In 2002, the Trade and Industry Committee looked at the matter of retentions, compiling the report, “The Use of Retentions in the UK Construction Industry”. It concluded that the use of retentions in public procurement should be phased out by 2007. That deadline came and went, so it is no surprise that in 2008 the Business and Enterprise Committee produced a report called “Construction matters”, which looked at cash retentions. That report noted that the system undermined team working, damaged the cash flow of small companies and impacted on training and innovation, and that it should be ended at least in all parts of the public sector. The theme is consistent, but we are still waiting for action.
Moving forward to 2016, the industry again hoped for action. In a Westminster Hall debate on 27 January, the then Business Minister Anna Soubry assured us that the matter would be addressed following a review by Andrew Wolstenholme, to be completed by the end of that year. Due to cynicism in the Chamber, she confirmed that
“prevaricate in any way or seek to knock things into the long grass.”—[Official Report, 27 January 2016; Vol. 605, c. 149WH.]
The following month, when the Enterprise Bill was going through its stages in the Commons, the same Minister said of cash retentions:
“I think they are outdated and I do not think they are fair. They are particularly unfair to small businesses.”
Yet the Government still defeated amendments proposing to eliminate the use of cash retentions, including one that I tabled on Report. When I expressed concern in Committee about timescales, the Minister also stated that
“the hon. Gentleman can be assured that this Minister gives absolutely her word that this matter is not going to be kicked into any long grass. In fact it is very short grass, which has only just grown, because the review will be completed by March and then recommendations will go out to public consultation. If legislation is required as a result of that consultation, I will be happy to be the Minister to take that through.”––[Official Report, Enterprise Public Bill Committee, 9 February 2016; c. 47-48.]
We now know that the consultation process did indeed end up in the long grass. In 2017, I tried to take through a private Member’s Bill on the subject. Although the election killed that Bill, it is fair to say that the Government would have blocked it anyway, given that they did not back the Bill of the hon. Member for Waveney (Peter Aldous) in the last Parliament. We had both had considerable cross-party support for our Bills, so it was disappointing that neither made any progress.
The only action taken by the Government since were the BEIS consultations on “Retention payments in the construction industry” and on “2011 changes to Part 2 of the Housing Grants, Construction and Regeneration Act 1996”, undertaken between October 2017 and January 2018. To be fair, three meetings with industry and stakeholders were held, and those groups agreed that the status quo and doing nothing were no longer regarded as a viable option.
With the last consultation closing in January 2018, I have been getting frustrated—two years later, and no sign of anything happening. Then mysteriously, the day before this debate, the Government magically publish the responses to the consultation. Who would have thought it? Luckily for the thrust of my debate—I had already written some of this speech—that did not change what I planned to say, because we only have publication of the consultation responses. There is no hard evidence for what the Government will do next. Sadly, I fear for industry and the SMEs that the long grass is once again being prepared.
One of the just published documents on cash retentions states:
“Our aim is to work with the construction industry and its clients to achieve a consensus within the industry on how to resolve the problems associated with cash retentions. Several policy options are under consideration, a possible retention deposit scheme, and phasing out of retentions completely, and work continues to assess the viability and potential impact of these.”
It feels like we are going in circles, but will the Minister at least confirm that the status quo is no longer an option?
Why was there no acknowledgement in the consultation publication that a deposit retention scheme is the preferred option of respondents? Separately, the Scottish Government are consulting on retentions, including the possibility of introducing a deposit retention scheme. Their consultation closes on 25 March, but a key premise of the consultation is based on Pye Tait research, which states:
“The research particularly noted that retention money held in trust in a separate, ring-fenced account until it is either used to rectify defects or becomes due for payment or in some form of retention deposit scheme would meet almost all of the serious criticisms of the current retention system.”
That would allow a statutory solution to help prompt payments and deal with problems with cash flow. It has certainly given hope to SMEs that action will be taken in Scotland, and I urge the Scottish Government to follow through on that. Given their early adoption of project bank accounts, I expect them to be more receptive. It is fair to say that their consultation is a stage ahead of the UK Government’s.
The thing is that a working deposit retention scheme solution is at hand. Industry bodies and a major tier 1 contractor have been working collaboratively with academics, banking and financial experts, insurers and software developers to develop an IT platform as a digital solution to ring-fencing cash retentions. The key features in the proposed retention deposit clearing house scheme are that the aggregate of the retention moneys handed over to the client will held in a bank account and ring-fenced by a trust, and allocated to all supply chain firms as is relevant to their deductions. Also, firms will be able to use an app for online checks of the amount of their retentions held in the scheme. An insurance policy will be made available to the client to cover any shortfall in the scheme in case there is non-compliant work that is not rectified, because of insolvency, for example. The scheme will be regulated by the Financial Conduct Authority. The costs of administering the scheme are estimated at just £23 per £10,000 of main contract value, so cost is clearly not a barrier to introducing it.
It transpires from the responses that have just been published that the retention deposit scheme is the preferred option. Additionally, as I am sure the Minister is aware, the BEIS roundtable meeting of client and industry stakeholders in May 2019 voted for work to begin on the feasibility of a retention deposit scheme. I want therefore to ask the Minister what Government progress there has been to date, in relation to that work. What is the Department’s timetable for taking action on protecting cash retentions? Those are the key issues on which I am looking for an answer from the Minister—but by way of a conclusion there are some other questions I should like to put to him. Why did it take so long to publish the responses to the consultation? Does he agree that tier 1 contractors should not use subcontractor retentions for their own cashflow purposes? Will he definitively rule out the status quo? I have outlined Scottish Government recognition of the need for legislative measures on retentions, so what plans does BEIS have for legislative solutions? What is the Government position on retentions within their own projects? For example, will BEIS confirm that retentions will be removed from all Government-funded projects, as has been recommended for decades?
I genuinely hope that the Minister can give positive responses. Maybe he will be the one to cut through the long grass that cash retention has been hiding in for a long time. I assure him I would be happy to work with him to help him cut that grass, and help companies to get the money they deserve.
It is a pleasure to serve under your chairmanship, Mr McCabe. I congratulate the hon. Member for Kilmarnock and Loudoun (Alan Brown) on securing the debate. As he mentioned, he and I both have form on this subject, in that we have both introduced ten-minute rule Bills to address the deep-rooted problems associated with cash retentions in the construction industry. He presented his Construction Industry (Protection of Cash Retentions) Bill in 2017, and our former colleague David Simpson initiated a debate in this Chamber in January 2016 following the collapse of the Patton Group in Northern Ireland. That left £10 million of retention moneys outstanding, which SMEs never saw again. My own ten-minute rule Bill was presented on 9 January 2018, a week before Carillion collapsed with £800 million lost to creditors, many of which were SMEs caught with retentions outstanding.
The problem has plagued the construction industry for a long time and should really have been addressed in the 1990s when Sir Michael Latham produced his report, commissioned by both the Government and the construction industry, entitled “Constructing the Team”. It had a significant impact on the industry and led to part II of the Housing Grants, Construction and Regeneration Act 1996, generally known as the Construction Act. Unfortunately, one of Sir Michael’s recommendations remains outstanding and has never been implemented. That relates to cash retentions being retained in a secure trust fund. Two and a half decades on, we really should now be putting right that glaring omission. It is a scar that has blighted and held back the construction industry for many years and caused personal anguish and distress to the proprietors and staff of many businesses.
Is not the situation exacerbated by the fact that contractors and indeed their employees are way back in the list of preferred creditors?
That is true, and reminds me of something else I am handling at the moment where Her Majesty’s Revenue and Customs is put right at the top of the list. The right hon. Gentleman makes a good point.
The hon. Member for Kilmarnock and Loudoun has explained the problem and I shall not go into much detail about it. Retentions are ostensibly held as security in case a firm fails to return to rectify defects. In practice, they are often withheld to bolster the working capital of the group withholding them. Under standard industry contracts, they should be returned within 12 months of the handover of the works in question, but there are regular delays, often of up to three years. I have seen one case of a delay of 12 years, and some retentions have even been held in perpetuity, as they are never returned. Most of that cash is provided by SMEs. No other industry puts so much cash at risk and places such burdens on its small businesses. That abuse of retentions has a negative knock-on domino impact that cascades through the construction industry. It restricts investment in new equipment and facilities, prevents firms from taking on more work, and disadvantages them in relation to employing more people and investing in apprenticeships. At a time when we need to build more homes and invest in infrastructure, the construction industry should be operating at full throttle. Instead, owing to the self-imposed brake of retentions abuse, it is struggling to get out of third gear.
What is the solution? There have been many failed attempts to solve the problem voluntarily, and they have all got nowhere. We can continue to go round and round in circles, but we should be introducing a statutory solution with legislation that secures the moneys so that they will be able to be returned, subject to the other party having recourse to the money. The Construction (Retention Deposit Schemes) Bill that I presented and the hon. Member for Kilmarnock and Loudoun kindly supported proposed that retentions should be retained in a Government-approved scheme. That would operate in a similar way to what is required for shorthold tenants under the Housing Act 2004, whereby deposits taken from them must be placed in an approved scheme. Ring-fencing the moneys in that way will mean that they will be secure, and available to be released on time rather than, as currently happens, after a wait of three or more years—if ever. That will help to increase the velocity of cash in the system, and if moneys are secured in that way banks will be able to lend to firms on the back of such security.
It is appropriate to look briefly at the situation in other countries. The UK is now very much out of step with what happens elsewhere, where there is legislation ring-fencing cash retentions and/or providing security for construction payments in general. In Canada and the United States there is a system of charges that can be placed on a building or structure by a firm that has not received its payments. Australia and New Zealand have legislated to ring-fence the money. France has a statutory framework that requires bank guarantees to be used as security for payment in the construction industry. The Bill is a relatively straightforward one that amends the Construction Act and requires the Secretary of State to introduce regulation to protect moneys.
My hon. Friend has a fan in Kettering. Mr Brian Griffiths, of Griffiths Air Conditioning and Electrical Contractors, which employs 30 people locally, has mentioned my hon. Friend to me in dispatches. Mr Griffiths is of the view, as am I, that the ready-made solution to the problem is my hon. Friend’s Bill, which the Government could simply introduce as a Government Bill. Not only is my hon. Friend outlining the problem extremely effectively, he is providing the Government with a ready-made solution.
I believe that the Bill is the framework for resolving the issues, and an awful lot could flow from putting it in place.
A retention deposit scheme seeks to safeguard the money. Cash retentions can still be deducted as security, but they in turn must be secured by depositing them in the scheme. Failure to do so will mean that any contractual clause enabling the deduction of cash retentions would be invalid. The Bill would finally bring closure to the many efforts that have been made over the past two decades and before to address the problem. In doing so, it would transform the prospects of many SMEs that make up the vast majority of firms in the UK construction industry.
To the outside world, nothing has happened since January 2018. The Brexit impasse brought the machinery of government to a halt. However, behind the scenes, a fair amount has been going on. As a result of the outstanding efforts of the Building Engineering Services Association and the leading electrotechnical and engineering services body, the Electrical Contractors’ Association, the January 2018 Bill secured the support of more than 80 industry bodies and trade associations, representing over 580,000 businesses and sole traders. It was the largest fair payments campaign ever formed in the UK, representing every level of the supply chain from across the construction and engineering professions. The British Chamber of Commerce, the Federation of Small Businesses and the Institute of Directors were also supportive. Only last week, Suffolk-based Breheny Civil Engineering, one of the largest privately owned regional civil engineering contractors, wrote to me in support of the Bill.
In the last Parliament, the Bill received strong parliamentary support, with more than 250 MPs from across the political spectrum indicating their support. Indeed, on the list that I have before me, in perfect alphabetical symmetry I am second from the top of the list and the Minister is second from the end. It is appropriate to acknowledge the work of previous Ministers at the Department for Business, Energy and Industrial Strategy who recognised the need for change, in particular my hon. Friend the Member for Rochester and Strood (Kelly Tolhurst) and our former colleague Richard Harrington.
Richard convened a roundtable meeting of industry representatives to address the problem. He very kindly ensured that I received invitations to the opening session in October 2018 and the concluding one in May 2019, although by then he was no longer a Minister. He made absolutely clear at the outset that doing nothing was not an option, and that we cannot continue to kick this particular can down the road. I got the impression that he wanted this reform to be his legacy from his time in office. Unfortunately, it was not to be. The outcome of the roundtable was not conclusive, though, on balance, my sense is that there was a clear preference for a retention deposit scheme as the Bill proposes, rather than an alternative surety bond-based solution.
Over the past 18 months, pay2Escrow has been modelling how a retention deposit scheme could work. The hon. Member for Kilmarnock and Loudoun outlined that scheme; pay2Escrow has taken me through its proposals, and I understand it has made presentations to officials at BEIS. I would anticipate that the Minister has been briefed on those.
I presented my ten-minute rule Bill 10 days before the Government’s consultation on retentions closed. Yesterday, they published a summary of the responses. Of the 52 responses in Citizen Space, 60% thought that a retention deposit scheme could apply to the whole sector. Of the seven business representative organisations that responded to the same question, 71% considered that an RDS could apply to the whole sector. Some 82% of 55 responses in Citizen Space believed an RDS should set up on a statutory footing. Of the eight business representative organisations that responded to the question, 75% believed an RDS should be set up on a statutory footing. The Minister concludes his foreword to the summary by stating:
“We will continue to work with industry on these issues and the policy options for addressing the problem of unjustified and late payment of cash retentions.”
Will the Minister address three questions? First, does he agree with Richard Harrington that doing nothing is not an option? Secondly, will he facilitate a pilot for the retentions deposit model that has been worked up? Finally, will he work to secure Government time for the passage of the Construction (Retention Deposit Schemes) Bill?
The hon. Gentleman has done a tremendous amount of work on this issue. What does he think is the Government’s underlying problem? Where in government does he think is the blockage against what is universally agreed to be a desirable solution? Who is holding this up?
I will try to answer, although I think the Minister is the best person to do so. First, there was the Brexit impasse, when nothing happened. Secondly, over the years, the main contractors have probably thwarted it, saying, “No, it’s going to cause us cash problems and the whole edifice will be crumbling down.” That said, some people in those firms who initially said, “No, you don’t want to go down this line,” have actually changed their tune, and now say, “Come on, let’s get on with it.” Thirdly, there has been concern that it is too difficult to put in place, so we should put it in the “too difficult” tray. The point of the pilot and the work over the last 18 months is that a solution is now ready to go. Those are the reasons I think things have not happened for a long time, but now is the time.
It is a pleasure to serve under your chairmanship, Mr McCabe. I thank my hon. Friend the Member for Kilmarnock and Loudoun (Alan Brown) for securing this debate. It is fair to say that the practice of retentions remains a controversial issue. I hope that this debate has cast a little more light on the financial challenges facing the construction industry across the UK.
I would like to highlight a point made by my hon. Friend: some of these cash retentions have been withheld for many years, with an impact on productivity. The hon. Member for Kettering (Mr Hollobone), who is no longer in the Chamber, made an excellent intervention about small and medium enterprises not having the time, resources or legal skills to chase outstanding moneys. He recommended action—the best action would be a Bill in which the Government provide a solution.
The right hon. Member for Warley (John Spellar) spoke about the chain of subcontractors involved, and the monumental ripple effect through the industry. The hon. Member for Waveney (Peter Aldous), who is to be congratulated on introducing a ten-minute rule Bill in January 2018, made the point that the issue should have been dealt with in the 1990s, and has been dragging on all those years. He made the interesting point that some of the cash retentions have actually bolstered the working capital of groups that withhold the cash. The abuse of retentions prevents firms from investing and employing more staff. The way to go is definitely legislation.
Retention payments can skew the types of firms that bid for contracts. The practice of retentions has a significant impact on the entire supply chain, with small to medium-sized firms disproportionately affected. Many construction firms report that they will not even consider taking contracts that insist on retention payments, with significant implications on the types of firms that will bid for particular projects. Retentions also have a significant effect on cash flow and the supply chain. Although retentions will not be the only reason for late or non-payment for a project, anecdotal evidence suggests that cash retentions can cause or exacerbate cash-flow problems, meaning that companies with otherwise healthy balance sheets and considerable assets can be placed into administration or liquidation. That is especially true when companies are under pressure to win contracts by delivering high-quality work at low prices, leaving them little room for manoeuvre if projects overrun or incur substantial unforeseen additional costs.
My hon. Friend the Member for Kilmarnock and Loudoun referred to the collapse of Carillion. The impact of Carillion’s collapse on the construction industry and the wider public sector is well documented. However, it would be remiss of me not to highlight the fact that Carillion went into liquidation owing more than £1 billion to 30,000 suppliers, many of which were smaller firms that subsequently suffered major cash-flow problems because Carillion demanded up-front payment. Carillion’s collapse demonstrates how vulnerable smaller companies can be in the supply chain. It is the tip of the iceberg.
The UK Government’s own research found that smaller construction firms lose almost £1 million in fees per working day due to insolvency issues further up the supply chain. That is untenable. The economy is not well served if smaller firms can be held to ransom by larger firms, placing every other contractor in the supply chain in a precarious position.
Late and non-payment has a real human cost, too, which my hon. Friend mentioned. It was worrying to hear the statistics about SMEs, including the fact that cash retentions cause a lot of mental health problems. Construction News reported on 22 major administrations of construction firms in 2019. There are hundreds of job losses each time a firm closes its doors. As we saw with Carillion’s collapse, the precarious nature of the system is felt most acutely by employees. It is incumbent on MPs to do what we can to tackle the scourge of late payments.
We need to create a level playing field for different firms to bid for major construction projects, while ensuring that those commissioning construction projects can have confidence in the quality of the works that are carried out. They need to feel that they have appropriate guarantees and a way to sort out defects should anything go wrong with the project, but the withholding of cash, particularly from small firms, could be the difference between a business completing a contract and going under. We must offer firms alternative quality assurance models for construction works, such as retention bonds, performance bonds and parent company guarantees, all of which provide security through a third party and avoid the cash-flow issues and problems of late and non-payment that we have discussed.
The Scottish Government, as my hon. Friend mentioned, are well aware of the impact of retentions on the construction industry and are consulting firms across the sector on possible alternatives. I encourage all those with an interest to submit their views on the impact of retentions on their business by the deadline of 25 March. The Scottish Government’s proposal of a retention deposit scheme as an alternative mechanism to guarantee works has considerable merit, and I look forward to seeing at the end of the consultation period how construction firms responded to that proposal.
The UK Government have also consulted on the use of cash retentions. My hon. Friend mentioned that that consultation closed more than two years ago. It has taken the UK Government far too long to address the issue—although as he said, magically, the response was published yesterday, in advance of this debate. Why has it taken so long to publish the findings? What steps does the Minister intend to take to encourage the use of alternative quality assurance models for construction work? We want to move forward on reforms that give construction firms financial security while giving the public confidence in the quality and safety of building works.
I congratulate the hon. Member for Kilmarnock and Loudoun (Alan Brown) on securing yet another debate on this topic.
“Stop, thief!” That was my reaction when I learned that £573 million has been lost by SMEs in the construction industry in the two and a bit—quite a bit more than a bit—years since October 2017, when the Government published a report showing that £229 million a year is lost as a result of the application of retentions, which has been described so well by Members across the Chamber.
A crime has been committed. In fact, a series of crimes has been committed over many years. This is a crime in which there is an imbalance of justice between large and small: the big firm is allowed to exploit the small firm with impunity and continue to get away with it. The perpetrators are a relatively small number of very large organisations. The victims—in any crime there are victims, and we should take their side—are SMEs in the construction sector, and self-employed contractors, who often rely on SMEs for work. Retentions are applied unfairly and disproportionately in the supply chain. It is a crime that that has been allowed to continue.
Let us see some action to stop the thief. Let us end this criminal activity and imbalance. Let us ensure there is a level playing field in the construction industry by taking the kind of action that the hon. Members for Waveney (Peter Aldous) and for Kilmarnock and Loudoun, and many of the rest of us, have sought for some time. It is time the Government stood up for the little person rather than siding with the large corporates. Frankly, the lifestyles of a small number of people running large organisations are funded on the backs of hard-working owners and workers in small businesses in the construction sector. Why on earth is that allowed?
I am afraid that the idea in one of the consultation responses that we should not worry about insolvency because there is a buoyant market is at best complacent and at worst downright disingenuous. We have only to look at what happened with Carillion—I think it was actually £2 billion in late payments that was lost by 30,000 businesses—and at the examples given to us by the Federation of Master Builders. K&M Decorating lost £230,000 in retentions alone. A number of the federation’s members that were in supply chains with Carillion went into liquidation as a result of unpaid retentions. We must not be complacent. We cannot afford to take the attitude that insolvency is not the problem that it really can be. Insolvency often happens, and even when it does not, chasing retentions—certainly the final element of them—is a huge problem for many businesses, some of which give up.
Let us remember that the amount of retentions we are talking about is often the margin for smaller firms in construction contracts. If firms are unable to collect those retentions, their financial viability is often threatened.
Does not that mean that many big contractors are in a mutually destructive relationship? If some of their subcontractors—or even their sub-subcontractors—go bust, they have to bring in new firms, delaying and putting at risk their projects. Somebody—actually, it has to be the Government—has to break that mutually destructive cycle.
I agree with my right hon. Friend, and that goes back to what the hon. Member for Waveney said about the big contractors beginning to wake up. They cannot carry on as they are because by continuing this disruptive practice, they will be undermined. When the large firms start to challenge the very behaviours from which they profit, we start to realise that perhaps those behaviours are coming to an end. We live in hope that that is part of the answer.
Some of the consultation responses said, “Everything’s fine, leave it alone”, but that is clearly a minority view. We often see the attempt to get small firms to apply for prompt payment in return for a discount, a quite disgraceful business practice that happens not just in retentions but across the board—and not just in the construction industry. Again, the Government should be challenging and ending that. It goes back to the point about tight margins.
I take exception with how some of the responses were reported by the Government in the summary of consultation responses, because it was quite hard to tell the difference between the responses from large firms and those from small firms—the perpetrators and the victims. We could work it out in the end, but we had to really look for it. Perhaps the Minister will speak to that point.
A constituency firm of mine called WT Jenkins, which does highway lighting, showed me its files on the shelf in the office. Its typical retentions, when I spoke to it about five years ago, were between 5% and 10% of contract price. That is in the public sector. There are problems in the public sector and in the private sector, in house building in particular. The firm was waiting between two and five years; the hon. Member for Waveney mentioned three years in his speech. It is an absurd way to carry on.
Other Members may have seen a letter sent to the Secretary of State from R Durtnell and Sons Ltd, building contractors who had been going for 430 years. I hope the Minister has had sight of it. The firm’s three-page letter describes the refusal to pay, the exaggeration of claims of defects by the main contractors and an exploitative model. It made clear in the letter that it paid its suppliers and its retention liabilities on time, yet it had to suffer having retentions withheld against it for many months, if not years, in wholly unacceptable ways. Other hon. Members spelled that out well in their examples.
Like the hon. Member for Kilmarnock and Loudoun, I thought, “Great! We have had a Government response to the consultation. Fantastic news”—and then I read it. I thought that I could have told the Government every single one of the comments, because they have all been made in this House and to us individually by businesses and business organisations over the years. It has taken two years to get to the point of the response.
My right hon. Friend the Member for Warley (John Spellar) rightly mentioned the lack of urgency. We have had roundtables, with the last one, as we heard, happening in May last year. Why are we getting only a summary of responses? Why have we not had an action plan? A paragraph saying:
“Several policy options are under consideration”,
simply does not cut it. That is not good enough. It will not stop the crime of retentions. We need action and we need it fast.
In the consultation, the phrase “the principle is sound” was used when referring to the concept of retentions. Not, I am afraid, in the way it is applied. It is not doing anybody any favours, certainly not those at the sharp end. As we have discussed previously, it is increasingly affecting the industry as a whole and those at the top as well. We can see some signs of improvement in the public sector with project bank accounts. Highways England is spending a £20 billion on work through project bank accounts and the devolved nations are taking active steps along similar lines.
The Government have a great tool in procurement. They can insist that those who spend money with the Government apply productive, responsible business behaviours through their supply chains. Why are they not doing that already? Perhaps they are considering that in their response, and perhaps the Minister will say that they will take such an approach. The fact that the tenancy deposit scheme in the private rented sector is effective and works well shows what kind of model can be put forward. The hon. Member for Waveney’s ten-minute rule Bill gives the Government a blueprint for what could be applied.
The hon. Member for Kilmarnock and Loudoun mentioned Dame Judith Hackitt’s comments. A poor quality of work is one of the system’s consequences, with substitutions for poor materials made because of the impact of non-payment in the retention system on cash flow and profits. It is a very real problem, and anybody who looks at the poor quality of new build housing can see exactly what is happening. I have seen it at a 300-home development in my constituency next to the new Maghull North station, with shoddy work and the application of retentions while the developer, Persimmon, makes vast profits and pays significant bonuses to its directors. It is not good enough and it has to change.
The Housing Grants, Construction and Regeneration Act 1996 is quoted by a number of respondents to the Government consultation. Pay-when-paid is not allowed, but it continues and we need further action, intervention and support to deal with that problem. Is it not about time that the Small Business Commissioner and their office had full responsibility for looking into this issue and were given the resources needed to address retentions in construction in both the private sector and Government procurement supply chains?
This is an incredibly important issue for the construction industry and the wider economy. When will we get the full Government response? The Government say that they will work with industry. The policy options mentioned in the report are
“a possible retention deposit scheme, and phasing out of retentions completely, and work continues to assess the viability and potential impact of these.”
Why has it taken so long? When will it come forward? It should have been with us today had anything been brought in front of us for the debate. The retention deposit scheme has clear support in the consultation, as does a phasing out of retentions altogether. Everyone expects the Minister to give some answers on those ideas at this stage.
A level playing field is needed. Suppliers have to be treated fairly. There can be no more Carillions. There must be an end to the crime of retention and to the abuse, as well as proper support for victims and justice for the construction SMEs and self-employed contractors. In whose interest is it to continue as we are? It is certainly not in the interest of the small businesses and the self-employed contractors, and it will not be in the interest of the large firms for much longer. The Government can do something about this issue. They have the evidence to act and they must get on with it.
It is a pleasure to serve under your chairmanship, Mr McCabe. I thank the hon. Member for Kilmarnock and Loudoun (Alan Brown) for initiating this important debate. I also thank my hon. Friend the Member for Waveney (Peter Aldous) for his excellent contribution, and thank the right hon. Member for Warley (John Spellar) and my hon. Friend the Member for Kettering (Mr Hollobone) for their interventions.
The construction industry is vital to our future prosperity. Its turnover in 2018 was £413 billion, it accounts for 9% of the UK economy and it employs around 9% of the UK workforce, which is about 3.2 million people. The industry also builds and maintains our places of work, our schools, our hospitals, our economic infrastructure and, of course, our homes.
My hon. Friend the Member for Waveney asked me three questions. In answer to the first, which I will refer to as the Harrington question, the Government are committed to tackling the problems of late and unfair payment that burden businesses. That is why we have introduced a number of measures, including requiring large firms to report on their payment performance, the power to exclude firms that consistently pay late from Government contracts, and the prompt payment code.
Prompt and fair payment has long been a problem within the construction industry. Payment has traditionally cascaded down supply chains, as we have heard from a number of colleagues. As a result, smaller firms in the supply chain carry a disproportionate amount of project and payment risk, through late or non-payment; my hon. Friend the Member for Kettering gave Griffiths Air Conditioning and Electrical Contractors as an example of that.
Cash retention is an example of a payment practice vulnerable to both insolvency and abuse. Many construction contracts include provision for cash retention. Holding retention money is a long-established way of providing insurance against defects in an industry that is highly fragmented and operates on a project-by-project basis and in which defective work can be common. However, the practice does not offer protection to contractors against the loss of their retention due to upstream insolvency, as we have heard, including in the examples given by the right hon. Member for Warley. It can be subject to late, partial or non-payment for the supply chain. I reassure you, Mr McCabe, that Ministers acknowledge that there is a strong case to reform the practice of cash retentions, which is why we committed to review retention payments.
It may be helpful to outline the work that my Department has undertaken on this issue to date. We have consulted on the introduction of a retention deposit scheme, and produced an independent research paper on the issue, and we have looked at other solutions to the abuse of retentions. Following the consultation, we have worked with firms in the industry and with public and private sector clients to gather further information and to discuss possible solutions.
Further work has been undertaken to analyse the design, operation, costs and wider implications, including costs for the industry, of both a retention deposit scheme and a statutory ban on retentions. That work included ministerial roundtable meetings, which my hon. Friend the Member for Waveney mentioned, with key representatives from across the sector and from clients to tackle the abuse of retentions. While most people in the construction industry favour change, there is no consensus on the solution.
Quite frankly, has this issue not been researched and consulted on to death? As with most things in life, it will always be the case that there will not be unanimity. However, is it not the role of Government, and particularly that of Ministers, to make a decision, drive it through and make it happen? Without that we will keep going round in an endless cycle, while the industry, in all its various manifestations, is in a negative cycle of mutual abuse, which is dragging it down.
The hon. Gentleman makes a powerful point. He is right that we have to make a decision, but it is complex and we do not want to create perverse incentives in a different direction. Consensus is necessary, as costs are driven by the extent to which industry adopts or resists change. If the industry does not adopt it, one sees a perverse incentive. It is clear that cash retentions in construction are a complex issue. I may be new to this job, but I spent many more years in business than I have spent being a Member of Parliament or a Minister. Sometimes the wrong decision can create a perverse incentive.
As the right hon. Member for Warley (John Spellar) pointed out, are the Government not incentivising companies to dig their heels in and keep saying no? If the Government wait for consensus, that incentivises the wrong behaviour for contractors. As has been outlined in this debate, this situation has been going on for decades. We are not getting anywhere because the Government are waiting for a magic, 100% consensus.
I opened by saying that the Government are committed to tackling the problem of late and unfair payments, so I hope that answers the question whether we are going to do something about the issue.
To respond to other points that were raised, the hon. Member for Kilmarnock and Loudoun and my brilliant hon. Friend the Member for Waveney both mentioned their private Members’ Bills. It is important that any action we take is robust, proportionate and evidence based, which is where we are at the moment. Several policy options are under consideration, including the retention deposit scheme. It would be premature to commit to anything at this stage while several policy options are under consideration.
The Minister is right to look for evidence. We have a tenancy deposit scheme that works. We have evidence from New Zealand, Canada, Australia, France and New Mexico that such a scheme is possible in construction. The evidence of best practice from around the world is in front of him. The evidence is also there from the construction industry in this country that it is desirable and needed. This has gone on for far too long; can the Government just get on with it?
I am grateful to the hon. Gentleman for his encouragement. The hon. Member for Kilmarnock and Loudoun talked about a clear majority supporting the retention deposit scheme. I take issue with that, and not as a party political matter. There is no clear majority supporting any solution at the moment. It is right for the Government to begin to distil opinions and come to a view.
The hon. Member for Kilmarnock and Loudoun also mentioned that significant parts of the industry have called for the scheme and asked why the Government will not legislate for it. Given the evident complexity of the policy issues, as we have discussed, it would be premature to commit to introduce a retention deposit scheme. In addition, costs are driven by what the industry wants to adopt and what it wants to resist. Unfortunately, the lack of consensus to date means that a preferred solution has not yet emerged. We will continue to work with stakeholders and I would like to think that we can get to a place where we have that consensus.
Let me try to help the Minister out of this—we would even be prepared to call it the Zahawi scheme if he wants to do it. Waiting for unanimity and overall consensus is a recipe for eternal inertia. The Government have a real interest, not just from the point of view of the economy as a whole but as a client, so let me ask him the straightforward question: when is he going to come to a conclusion and decide the way forward? I am not asking for an exact date, but how about a month?
The temptation is great, but the issue is complex, as I have said—
It is not.
I do not agree. I hope I have built a reputation over the past decade of being someone who is evidence led; it is important that we do that. My hon. Friend the Member for Kettering talked about the inability of small firms to pursue unpaid moneys because they do not have the time or the resources. The 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 were introduced to ensure fair and prompt payment through facilitating better payment, adjudication and arbitration processes, particularly for small businesses. I wanted to put that on record as well.
Going back to timescales, the Minister is not willing to commit to a month—forget that—but surely to goodness he could give us an idea of a programme and also explain why it took two years, following the responses to the consultation, for them to be published? That does not give confidence that there is any clear programme for the Government.
I refer the hon. Gentleman to the answer I gave earlier. We are absolutely committed, but it is a complex issue. My hon. Friend the Member for Waveney rightly asked the Government to agree that action should be taken. It is important to remind ourselves that we have now published the summary of responses to the consultation on the practice of cash retention. We will continue to work with him, with others and with industry on these issues and on policy options to address the problem. We are committed to addressing it.
My hon. Friend’s final question was about a pilot scheme. My officials have met with representatives of Pay2escrow on several occasions to discuss the proposal for a deposit retention scheme, and the meetings have been helpful in clarifying and understanding its work. We remain in dialogue with industry to try to build consensus on the future policy. As I said, given the complexity, it is important that we make the commitment when we think it is the right thing to do. I want colleagues to understand that we are committed to that process.
In the Government consultation, 82% of respondents thought that existing measures were ineffective in addressing the challenges of prompt release and security of retentions. The Minister mentioned an independent research paper. Can he tell us how long that research paper is going to take? Is this not, frankly, a matter of kicking this issue into the long grass once again?
I think it is unfair and wrong to say that—we are not kicking the matter into the long grass. I have repeated over and over again that we are committed to dealing with this issue.
I will answer the hon. Member for Sefton Central (Bill Esterson), because he asked an important question—why will the Government not expand the remit for the Small Business Commissioner to include the construction industry? The honest truth is that the Government do not intend to extend the scope of the Small Business Commissioner’s activity to the construction industry. Section 4(5) of the Enterprise Act 2016 states that where,
“the complainant has a statutory right to refer the complaint for adjudication by a person other than a court or tribunal,”
that complaint is excluded from the commissioner’s complaint scheme.
The Government believe that that is the correct approach to considering the complexity of construction contract disputes, which tend to be incredibly technical, and we do not intend to extend the scope of the commissioner.
In answer to the question from the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier), the research was published during the consultation process. I hope that that sets her mind at rest.
I am grateful to my hon. Friend for looking into this issue in such detail, and I appreciate that he has been in his role for only two weeks, but can he confirm that the status quo is ruled out completely and that he will be coming forward with alternative proposals?
I think that my stating clearly and repeating over and over again that we are committed to dealing with this issue should give my hon. Friend the comfort he seeks that we are absolutely committed to dealing with this. Part of that process, as he can see, is the publication that we have made, and we will move forward to ensure we deal with it.
I will conclude by saying that there is no simple solution to the abuse of retention. Any changes would need to be implemented correctly and require consistent support from industry. I am clear that any solution must work for the industry and its clients, must be sustainable and must address all the issues and the need for both surety and fair payment.
Industry and clients need to work together to develop that alongside Government, as they are doing, and to define what the solution might be and how we create a process that gets us to that solution. I hope that that information offers some comfort to colleagues and some reassurance that the Government are committed—I say it one more time—to addressing the problems associated with the practice of cash retention.
The Minister has been very generous in giving way. He has said again that he is committed to tackling the issue, but do we have any idea of a timescale for this, or are we going to be back here in 2022 saying, “We were in Westminster Hall debating this issue”? Could we maybe get an idea of some sort of timescale?
The hon. Lady is right to continue to push on this issue; I agree that the process has been far slower than I would have anticipated or the Government would have liked. That is partly due to the complexity of the issue and one should not—[Interruption.] The right hon. Member for Warley may laugh, but it is complex, because we do not want to intervene and create perverse incentives, and of course a wide range of interested parties are watching this space. I promise that we will continue to work with the construction sector and its clients to achieve a solution to this problem.
Thank you again for your chairmanship today, Mr McCabe. I thank all hon. Members who have contributed. This is an important matter, but unfortunately, having the 3 pm slot on a Thursday afternoon has probably prevented other hon. Members from taking part, given that they will be back in their constituencies.
In terms of Back-Bench contributions, we had fantastic interventions from the right hon. Member for Warley (John Spellar) and some key examples from the hon. Member for Kettering (Mr Hollobone). I pay particular tribute to the hon. Member for Waveney (Peter Aldous), not only for his contribution today, but, more importantly, for the work he has undertaken with his Bill and in making progress on finding consensus on a deposit retention scheme. I am beginning to think that it is his willingness to get things done that keeps him on the Back Benches rather than the Government Front Benches.
We have heard, and we know, that cash retentions are costing jobs, training, opportunities and productivity, and ultimately—maybe the Minister should think about this—when companies go bust, it costs the Government in tax take. Yet today I am disappointed. I must say it is very disappointing. I know that the Minister is new in his post, but we are still hearing about options, about how complex the issue is and about how we need to find consensus on the way forward. He seems to be finding the long grass that his predecessors grew. I ask him to try to take hold of this situation.
There is a solution: a deposit retention scheme. There is a Bill there, and we can go on and get this done. As a minimum, at the very least, let us get a pilot up and running and let us get it done. The Government mantra that we keep hearing is about levelling up. Let us level up for the wee guys in the construction industry and sort this problem.
Question put and agreed to.
That this House has considered the use of cash retentions in the construction industry.