In the first of a new series looking at the government’s vision set out in the Construction 2025 report, Building asks if the opportunities it highlights for global growth really exist
Ambition in business is pretty essential. And there’s plenty of evidence of that in the huge vision the government has set out in its Construction 2025 report, its strategy for growth in the construction industry for the next 12 years.
One particularly intriguing area of potential the report identifies is the UK industry’s ability to benefit from growth in foreign markets, which it says is a largely untapped resource. “The UK has not yet specialised in construction exports, despite its capability in construction technology and services and relatively higher proportion of construction-related patents compared to its competitors,” it says. “Transforming the UK construction industry therefore opens significant opportunities for global trade.”
According to this vision, global success can be achieved by main contractors winning lead roles on overseas projects and passing the benefits back to their supply chains at home.
So, just how realistic is it that main contractors will win lead contractor roles on major international projects? And even if they do, is it plausible that their supply chains back home will feel the benefit?
Being part of the global growth
Whereas domestic increase in construction output is expected to be sluggish in the short to medium term, the Construction 2025 report quotes figures produced by Global Construction Perspectives that claim the global construction market will grow by an annual rate of 4.3% up to 2025. The anticipated rate of growth is greater in markets such as China, Brazil and other rapidly developing economies.
This, the report says, provides an opportunity, not just for well-known architecture practices and consultancies (domestic construction consultant can already boast a net trade surplus of around £530m), but for the UK construction industry as a whole. Overall, Construction 2025 reports that construction accounts for less than 2% of all UK exports, including products and materials (see below) and, given it is near 7% of GVA, suggests ways this poor performance could be improved.
“One reason for the low export figures is that very few of our prime companies lead on overseas projects,” it says. “Taking steps to enable UK firms to secure the lead role more often will enable us to make the most of opportunities in the high-growth global construction markets. From a lead role, there would be considerable potential to bring in UK-based supply chains, thereby multiplying the potential dividend to the UK.”
The problem is that UK main contractors find it difficult to win work abroad. Balfour Beatty has established itself in the USA and Hong Kong via acquisitions and now has around 10,000 employees in each, and Laing O’Rourke has also established viable businesses in Australia and Hong Kong. Carillion has over many years built up businesses in Canada and the Middle East, where revenues now account for 15% and 11% of the firm’s £4.4bn turnover. And Interserve and ISG also carry out work overseas. But in general, overseas expansion has proved elusive. As with Balfour Beatty, where contractors have established a strong foothold abroad it has largely been as a result of acquisitions and has required substantial upfront investment - the sort of investment that after five years of economic doldrums at home few firms are capable of making.
To suggest that you can do it with any mass form of labour or any manufactured products is just pie in the sky. I just don’t think it’s manageable
Kevin Cammack, Cenkos
Construction delivery is generally considered difficult because of the problems of managing supply chain risks in an unfamiliar market, as can be seen with the furore over workers’ conditions in Qatar. Consequently, where some main contractors are attempting to enter developing markets they are pushing their professional services divisions, allowing them to generate revenue without the huge risk of being responsible for delivery in markets with unfamiliar supply chains and legal systems. “Our contracting aspect is very much UK-centric,” says Jason Millett, chief operating office for major programmes and infrastructure at Mace. “Overseas we do a combination of mainly cost management and we do get into quasi-construction management roles from time to time.”
The picture is similar at other main contractors. For instance, according to Kevin Cammack, an analyst at Cenkos, Balfour Beatty is keen to enter the Brazilian market, but despite having mature contracting businesses in the UK and North America it is choosing to do so through its professional services business. “Does that give you great revenues?” asks Cammack. “No, it doesn’t. [But] it gives you quite good margins. When you’re addressing a market overseas the most sensible and de-risked way to do it will be through some sort of professional services role on a project.”
However, it is possible for main contractors to win lead roles on projects overseas and some firms are embracing the ambition set out in Construction 2025. “With some specific clients, including the
Foreign and Commonwealth Office, we do take on a more traditional contracting role,” says Mace’s Millett. “Mace has been working overseas for many years in all sorts of countries. What’s new is that off the back of London 2012 we’ve formulated a strategy that is all about growing our business overseas off the back of major programmes of work. So we have a 2020 strategy that fits in many ways with the vision for 2025.”
Carillion has also set its sights on growing its constructing business abroad. Shaun Carter, the company’s group development and strategy director, says of the firm’s work in Canada, the Middle East and north Africa: “These are the main areas we work abroad and absolutely as head contractor”.
A trickle-down effect
Contracting abroad will never be for all, or even most, UK firms though. However, Construction 2025 goes even further: it says if main contractors do succeed in winning lead contractor status on major projects overseas, this will lead to more work for their domestic supply chains. But will that be the case? Analyst Kevin Cammack is highly sceptical.
“When people talk about using a supply chain from England to support work overseas, I think that the only area in which you can be relatively confident of being competitive is on the professional services side of things,” he says. “So you’d take over the consultant engineer, the QSs and so on. To suggest that you can do it with any mass form of labour or any manufactured products is just pie in the sky. I just don’t think it’s manageable and I don’t see where the cost competitiveness will come from.”
More uncertainty comes from the fact Construction 2025 is not so clear on whether the logic applies to products and materials manufacturers (see box, left) as well as professional service providers and specialist contractors.
Indeed, even members of the panel of experts that advised the government on Construction 2025 interpret the reference to the “considerable potential to bring in UK-based supply chains” in the report as applying only to professional services. Panel member James Stewart, chairman of consultancy KPMG’s infrastructure practice, says: “Don’t forget that the supply chain isn’t just construction but professional services. So what we’re talking about is design, architects, cost consultants - that sort of stuff.”
For its part, the Department for Business, Innovation and Skills points to the recent success of two British subcontractors. A BIS spokesperson says: “Last month, Vince Cable visited the site of the world’s largest hospital construction project in Stockholm where two British SMEs - Astins and Measom - have secured contracts of around £30m.”
And not everybody in the industry is dismissive of the idea. At Carillion, Carter says that it is possible to push work back to supply chains at home - but it needs to be done proactively. “If you didn’t have a philosophy that supported [using UK supply chains] then it’s possible to do everything with local contractors and suppliers.” Carter says that Carillion has helped parts of its UK supply chain to enter foreign markets, for example Speedy Hire, which he says Carillion helped enter the UAE.
“We’ve done that where we think there is a gap in the market and we would benefit from greater competition,” he says, adding that firms have to be able to compete with local firms on costs as well as quality.
Similarly, Rudi Klein, chief executive of the Specialist Engineering Contractors Group, remembers a model developed by Taylor Woodrow before the firm’s construction arm was sold to Vinci in 2008.
Under the model, Taylor Woodrow developed what it called strategic alliance partnerships, involving most elements of the supply chain including M&E and lighting. The partnership would then bid for major projects, offering a complete package to international clients.
“Why not use a model that has been used before,” says Klein. “Certainly it helped Taylor Woodrow to win work. It was about one stop shop delivery, which went down very well in Africa. It can be enticing - selling a team could be a sustainable model.”
What’s more, Klein says that if main contractors were to combine the partnership approach with the UK’s relatively advanced use of BIM, the offer to international clients could be made all the more appealing. “If you’ve got a strategic partnership alliance all backed by BIM, selling that really is a way forward,” he says. “And with BIM you don’t even need to have everybody in the same place. You could do the design here, do the off-site manufacturing here and then ship the parts across in containers and just project manage the assembly in that country.”
It may well be that the government had just such schemes in mind when the final draft of Construction 2025 was produced. But if so, it’s a message it seems the industry is only getting by reading between the lines.
PRODUCTS AND MATERIALS: CLOSING THE TRADE GAP
One of Construction 2025’s key targets is to achieve a 50% reduction in the trade gap between total exports and total imports of construction products and materials. At the moment, the UK imports around £12bn of construction products and materials and exports £6bn.
According to Noble Francis, chief economist at the Construction Products Association (CPA), imports largely follow construction output in the UK. Exports, however, fluctuate. Closing the gap by 50% will therefore require the industry to increase exports by about £3bn over the next 12 years. “If you look back to 2003 then there was a much smaller gap on the construction products side,” says Francis. “So, it’s not unfeasible.”
But what types of products and materials are we talking about? It seems unlikely, for instance, that UK brick manufacturers will be able to contribute much: taken from a global perspective, their product is comparatively expensive to produce in the UK; it is bulky and costly to transport; and the technology and intellectual capital required for its manufacture is hardly cutting edge.
Moreover, from a sustainability perspective - another key theme in Construction 2025 - it is highly undesirable for such products to be transported over long distances. “A lot of heavy materials should be procured locally as part of the sustainability vision,” says Jason Millett, chief operating officer for major programmes and infrastructure at Mace. “It’s just not sustainable to transport things halfway across the world.”
Indeed, there is much agreement that only those products and materials that are relatively lightweight and easy to transport, and crucially that maintain a technological advantage will be able to compete on a world stage. “I mean, bloody hell, anywhere you go in the world there is always going to be somebody who can get the products cheaper,” says Kevin Cammack, an analyst at Cenkos. “So you’re looking at quite specialist products that travel globally. And it doesn’t strike me that there are many of those.”
Perhaps unsurprisingly, the CPA’s Francis disagrees. He says that even in mature construction markets, like the UK, there are gaps in the market that can filled by foreign manufacturers. The nuclear industry is a case in point, he says: the last new nuclear power plant was built in 1995, so presuming French firm EDF eventually goes ahead with Hinkley Point, it will out of necessity need to import materials from outside the UK, most likely from France itself.
“So if you can find areas where UK companies have specialities and their foreign competitors don’t have that sort of expertise, you may well find that they go with products they can source [in the UK],” says Francis. “It might be that they need high quality products - expensive types of lighting, wiring or air conditioning, for instance - that aren’t available [locally].”
Aiming for 2025
Published in July this year Construction 2025 is a joint strategy that sets out how industry and government intend to work together over the next 12 years. It sets out five areas in which the government and its advisers foresee substantial change, which are:
- An industry that attracts and retains a diverse group of multi-talented people, operating under considerably safer and healthier conditions.
- A UK industry that leads the world in research and innovation, transformed by digital design, advanced materials and new technologies..
- An industry that has become more sustainable through its efficient approach to delivering low carbon assets more quickly and at a lower cost, underpinned by strong, integrated supply chains.
- An industry that drives and sustains growth across the entire economy by designing, manufacturing, building and maintaining assets which deliver whole life value for customers
- An industry with clear leadership from a Construction Leadership Council that reflects a strong and enduring partnership between industry and the government.
To help achieve this, Construction 2025 contains four numerical targets:
- A 33% reduction in the initial cost of construction and the whole life costs of built assets
- A 50% reduction in greenhouse gas emissions in the built environment
- A 50% reduction in the overall time, from inception to completion, for new build and refurbished assets
- A 50% reduction in the trade gap that exists between total exports and total imports for construction products and materials.
JOIN THE DEBATE
Building.co.uk’s Construction 2025 community is one of 19 new community sections Building has launched online, bringing you specialist news, analysis and comment on key sectors and issues in construction.
The Construction 2025 community is a place to share thoughts on vision and strategy for the industry’s future: visit building.co.uk/communities to join the debate. Latest blog posts in the Construction 2025 community include:
Mike Putnam: Distinctive exports are key to industry’s future
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