Many have bemoaned the coalition’s reliance on private funding for infrastructure, but this new reality could benefit construction firms if they are able to adapt fast enough
Do you remember Tixylix? It was my preferred cough medicine when I was knee-high to a grasshopper. What I most remember is it tasted nice.
However, sometimes my mother decided on an alternative. I remember her administering spoonfuls of a certain other medicine that frankly tasted disgusting. I took it through gritted teeth and complained more about the supposed cure than the cough.
I have heard it said that the government would like to see a shift from a 65% privately procured and financed infrastructure market, to more like 80%
When the chancellor presented his latest Budget last month he was, a bit like my mother, faced with the choice between two medicines. He knew there was the “horrible tasting stuff” that would involve cutting government spending still further. It has become known as “Plan A”. He also knew that everyone would moan like hell and say they would prefer something that tasted much nicer, which would involve borrowing lots of government money cheaply and throwing it at building projects. That was “Plan B”. But if you hoped for it, please now accept that it is as dead as Monty Python’s parrot.
As we all know, the chancellor administered another bottle of Plan A. The industry choked, at least in public. But away from the media there is a different story, of industry leaders accepting that the policy landscape is now clear, and in many cases expressing enthusiasm to thrive in a market more dominated by private than public activity. Be under no illusion that this, from the government’s perspective, is entirely deliberate. I have heard it said that the government would like to see a shift from a 65% privately procured and financed infrastructure market, to more like 80%.
You may be intrigued to how this fits with the sudden passion for government-inspired industrial strategies – we have one on aerospace just launched and apparently one on construction in the wings. But look closely at the aerospace example and you will realise that what is meant is not a stratégie industrielle with the fingerprints of ministers all over a sequence of industry consolidation, but rather a partnership with the industry to identify key investment priorities.
From a UK market perspective I would not hold your breath on any government-inspired change in industry structure. But it is an exciting time in the industry if you recognise how the market, and our own innovation and boldness as individual companies, is driving change. The component pieces are well known – the huge need for investment in energy (both conventional and renewables), in city-region infrastructure, in digital and in housing; the impact of technology and Building Information Modelling (BIM), particularly on the way the industry communicates with its clients and through its own supply chains; and the dramatic scope for up-front and whole-life efficiencies in how we build, through better design, new materials, off-site production and a focus on sustainability.
There will be consolidation in this industry, and It will come about because technology will gradually bridge the layers that divide the industry supply chain
The challenge for everyone in the industry is how to position against this moving target – do you embrace innovation and try to lead; do you rely on being agile enough to be the fastest follower; or are you still at the stage of desperately trying to divest yourself of the success you once were so you have the vision and skills simply to compete in the industry that will be?
There will be consolidation in this industry (and it needs it), but it won’t come about because of a government strategy. It will come about because technology, reaching this industry about 20 years later than other sectors, will gradually bridge the layers that divide the industry supply chain. And in doing so it will challenge the idea that asset ownership, asset construction and asset management are discrete activities. Those who have heaped opprobrium on PFI may find that the last laugh is not PF2 but the evolution of the “traditionally procured” construction model (that even at the height of PFI represented fully 90% of government purchasing) into a world of what I call asset provision partners, who are contracted by global companies for end-to-end provision of fully-serviced premises and other assets.
At this point you may be wondering what substances were in the medicine I got as a child. But as Albert Einstein said: “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” Your competitors are already changing their thinking. Are you?
Richard Threlfall is head of infrastructure, building and construction at KPMG