Carillion & Interserve: How should the state respond?
The case for further government intervention in the construction industry
Rab Campbell, Chairperson, Wallet.Services
Project Bank Accounts (PBA) legislation is already in place for the construction industry in Scotland and Northern Ireland. Implementing PBAs in the rest of the UK seems the obvious response to this latest crisis in the construction industry. Is it enough? Wallet.Services Chairperson, Rab Campbell, argues for a more imaginative response from government to better protect firms at the foot of the supply chain and to unlock additional value.
Speaking to people in high value industries with long supply chains such as energy, automotive and aerospace, the concept of ‘only being as good as the supply chain you inhabit’ is one that is well understood. Participants in these industries recognise that excellent working relationships, up and down a complex supply chain, are essential in delivering the value-add their customers require. Such relationships are based on trust.
In the construction industry there are exciting technological developments afoot clustered around the idea of Building Information Modelling (BIM). This offers the prospect of creating a ‘digital twin’. It relies on collecting data from all the participants in the supply chain, and through this, mirroring the built environment. This facilitates better management of infrastructure assets, such as schools and hospitals, throughout their lifecycle – offering significant added value to customers. The digital twin can be trusted by all the stakeholders as a source of truth about the built asset.
But there are inhibitors in achieving more transparency in the construction industry. One of the most significant is trust. Building our future infrastructure assets is a ‘big ticket, low margin’ business. The collapse of Carillion last year, and the current difficulties at InterServe, make life precarious for members of the supply chain. This is particularly true for those at the foot. How can they be sure they will be paid, and how long do they need to wait?
The Scottish and Northern Ireland Governments have already responded positively to this challenge by introducing project bank accounts (PBAs). These allow for the establishment of a trust fund to hold payments, such that if the main contractor ceases trading, suppliers at the top of the chain can still be paid. This is excellent progress and one, some SMEs hope, where the current threshold for PBAs will be reduced to bring more SMEs into the PBA “fold”.
But addressing payment security at the top of the supply chain is only addressing a part of the overall picture. Requirements often included in public sector contracts, such as the use of local SME subcontractors, a fair allocation of risk, and prompt payment, needs to be much more transparent. Furthermore, government needs to know how the economic benefits of the large capital projects they fund are spread across the economy by geography and by type of company. This data is simply not available to them at the moment, as it is locked into other organisations’ systems.
I suggest that governments should go further, enhancing existing PBA legislation, by using modern digital technology to create a digital twin reflecting the way payments are claimed and made in the supply chain. The project bank account should become a project ledger.
Wallet.Services is a software engineering company that facilitates the use of distributed ledger technology (DLT) through our SICCAR platform. Distributed ledgers make it much easier to share data securely, facilitating trust and collaboration, and creating a single auditable version of the truth that can be inspected and relied upon by all the stakeholders involved. We are already working with the energy sector in this area.
Such an approach will improve upon the efficiencies expected through the use of PBAs in the construction industry. Rather than agreeing contractually what will be done, and then companies being obliged to prove it retrospectively, this approach securely captures what has actually happened in real-time. This digitally native approach dispenses with the need for paperwork to be compiled and collated from different systems, and removes the related, unproductive, administrative burden on businesses.
Defining and delivering public policy is becoming much more complex. Governments can no longer work alone. Good regulation should be based on sound data, and often that data is locked away in different stakeholder’s systems. It needs to be shared, but in a secure manner. Transparency is the best antiseptic. Rather than focusing on embedding difficult to verify requirements in construction contracts, government should consider providing a digital ledger as a virtual resource. This can be used by the whole supply chain to facilitate a digital twinned record of what has happened in reality, to demonstrate the economic benefits of major construction projects.
Such an approach would help with the introduction of more modern, higher value, approaches to creating and managing our infrastructure assets, such as BIM. It would accelerate the construction industry on a path to be a much higher value sector in our economy - by injecting the essential elements of trust and transparency into the supply chain.