Business as usual

The New Labour government has understood something that was quite beyond the comprehension of John Major’s Conservative administration. The construction industry is the accelerator of the country’s economy; it always has been and it always will be for the single reason that construction employs, both directly and indirectly, more people than almost any other industry. Furthermore, it is easy to spend money on construction quickly; money spent on defence and technology takes a little longer to produce results.

A cynic might think that New Labour’s enthusiasm for improving the health service may have something to do with the fact that building hospitals will directly influence the level of employment at the next general election. Optimists, of which I am one – the sort of people who look at a glass of whiskey and believe it half full as opposed to half empty – believe that the hospital building programme will help both the NHS and the construction industry.

One thing is certain, however; taxation ploughed back into the economy in this way will lead to greater prosperity in general. The pessimist will warn that this causes inflation. But many of us believe inflation is a good thing, provided it is kept under control. Predicted inflation of 2.5%, with a 3% growth in the economy, seems to be an admirable state of affairs.

This, of course, is the easy part. Actually getting constructors on to the site and building hospitals is a far harder matter than merely having the good intention of ordering the work. It is here that the matter moves away from theory and firmly into the world of reality. If, as many people suspect, it is the government’s strategy to build as many buildings as possible by the next election, then it will set out to do just that, and, given its demonstrably strong political will, it will succeed.

Construction should ignore the City – now is a splendid time for management buyouts

The other ingredient of success is cash, and Gordon Brown has seen to it in his last Budget that the NHS will get plenty of that. Despite the pessimism of many in the industry created by the poor record of the PFI initiative, an injection of cash and a will to succeed will probably do the job of snatching the PFI from the jaws of failure.

All of this bodes well for builders. So why does the City of London still ignore them? The simple answer is that building is a hazardous business. The past few years have shown this, with famous names going to the wall or being taken over for a pittance. As a result, those builders left have been through the fire and come out intact. One must have some sympathy with the City of London’s attitude, although it seems to misunderstand the truth of today’s situation. In the past, construction has been a little like farming. When it was possible to make money out of pigs, many farmers rushed into pig farming, and as a result none made a profit. When construction profits rise, they show a spectacular return on capital and this attracts a whole lot of investors whose only experience of construction is looking at roadworks on a motorway. Margins are cut to increase turnover and the whole ghastly cycle starts again.

So what should builders make of the City’s attitude to their prospects? I would argue that they should ignore the City, for a quotation is only useful to them if they need to raise capital. In an age when private capital is readily available, both profits and turnover look likely to improve. The prudent builder who is private will stay that way and those that are public will buy as many of their own shares as they can afford. It is far better to make a profit out of the City’s dismal view of the industry’s past than waste time trying to convince a sceptical City that construction has a golden future.