It’s not that Balfour Beatty is taking the recession in its stride exactly, but when the contractor ranked No 1 in the Building Top 150 greets deep government cuts with equanimity, you know it must be doing something right. Emily Wright asks chief executive Ian Tyler what it is
Sometimes you need a reference point to put things in perspective. To gauge the true size of Balfour Beatty, the No 1 contractor in our Top 150, that reference point is the Building Schools for the Future (BSF) programme, or rather the lack of one. Balfour Beatty was one of the firms most heavily involved in the initiative: its BSF projects total £200m each year. So how does it intend to cope now that 700 BSF projects have been axed? Balfour chief executive Ian Tyler ponders this for a moment in his Victoria office, before saying with a shrug: “Life will move on.”
Considering the near panic the cuts have caused in the rest of the construction industry, the 50 year old’s response is spookily calm. But the truth is that while hundreds of firms were relying on this programme for their survival, his wasn’t one of them. When you have a turnover of more than £10bn a year, the tailing off of a £200m stream of work is serious, but not exactly life threatening.
That’s not to say that Tyler doesn’t bemoan the decision on a more personal level, on behalf of the employees who were working on BSF contracts. “On a tactical level the cuts were important because bits of the business have been working very hard and were preferred bidder on some contracts,” he says. “But it makes up around 2-3% of our business. It’s just one piece, of one part, of one market in our business.”
The sheer size of the Balfour Beatty operation means the firm is in a different league from even its closest competitor in terms of stability. It has an order book for this year that is worth £14bn and its pre-tax profit for 2010 is £267m - £100m more than the figure for Carillion, the number two firm in the Top 150 contractors league table (page 38). Its turnover figure is more than double Carillion’s. But although Balfour Beatty may look like the blue whale of the industry - gliding serenely through the recession while competitors and peers slowly sink around it - Tyler is quick to say that there is no room for complacency and plenty of work to be done to keep the firm healthy.
Tyler’s strategy is to make the business as efficient as possible in the short term while preparing for the emergence of a booming infrastructure sector in the UK and abroad in about three years’ time. For this reason, the first thing he wants to make clear is that to call Balfour Beatty a UK construction business these days is inaccurate: “Only a small part of what we do as a business is involved with construction,” he says. “We are an infrastructure business. Plus, now we are bigger outside the UK than inside. And even in the UK the majority of our income is from services and infrastructure.”
In terms of the finer details of how he will ensure the firm continues to grow, he plays his cards close to his chest. But he has a reputation for delivering what he promises. Andy Brown, an equity analyst at Panmure Gordon, says: “Balfour Beatty is known for being a very well managed group. Ian has been in charge for three years and what he has done is put a clear strategy out in terms of growing the business internationally and by adding more professional services - as well as filling in regional gaps with smaller UK acquisitions … And he has, so far, always delivered on what he says he will, which bodes well.”
Tyler is convinced the infrastructure sector will be a key factor in Balfour Beatty’s future direction: “Infrastructure spend in the next 15-20 years will increase faster than the rate of GDP,” he says. “In pretty much all mature western economies there is a clear need to defer consumption and invest in assets that will provide economic growth for the future. In the UK over the next decade or so I think we will see a huge amount of investment in power - in the US, I suspect it will be in water.
“If you take the life cycle of infrastructure, it starts off with conceptual input and then goes through a process of feasibility, financing, design, construction, operations and maintenance,” says Tyler. “If you take those parts of the business, we are pretty evenly represented across all elements of that value chain. Traditionally infrastructure had been pigeon-holing itself into professional services, into construction, into support services, investment and financing. But now, for large-scale infrastructure, the boundaries are increasingly breaking down. As a result I certainly see our business having to look beyond simply individual elements of the infrastructure sector - our customers demand that. So now we are an infrastructure service provider - providing a service that runs across all elements.”
The firm is now focused on winning these projects, particularly power in the UK and water in the US. It has made a series of acquisitions to better position itself in the infrastructure market, the most high profile of which was the £350m purchase of US professional services group Parsons Brinckerhoff in September last year. Tyler believes the acquisition will not only add early stage delivery capabilities to Balfour Beatty’s services, but will also aid international expansion.
“Through Parsons Brinckerhoff we are now looking at involvement in the highways market in India; there is no way we could do that as a downstream contractor. But bringing the design and particularly programme management capabilities means we can add a lot of value to the market. We are also looking at China and other emerging markets like Brazil and Russia. We won’t be in all of them, but will be looking to go to places based on opportunities. We will only go to a country if it allows us to play to our strengths.”
The near future
But infrastructure is a long-term game.
What about the short term? That’s much more difficult to call, he says. “It’s ironic because on the one hand there is a demonstrable need, as identified by the Treasury, for substantial long-term investment in infrastructure, but in the short term the general assumption is that everything will go backwards due to the lack of government funding.”
He says that although the near future will be challenging, Balfour Beatty’s size, diverse markets and inbuilt strength mean he is not pessimistic. “You have to remember that we have a very widely spread portfolio. We are spread across countries and sectors. The result is that we’re exposed to an awful lot. While individual parts of the business might be up and down, overall we’re stable. We do have a sizeable order book, it stood at £14bn in December and that’s stuff contracted, not preferred bidders, so we have pretty good visibility about what’s going to happen over the next two or three years.
“Of course when we start to see growth reducing, which we will inevitably, there is a clear opportunity to focus on the efficiency of the business. Where our businesses are going to shrink, we will downsize accordingly. That will happen as a matter of course. Clearly those parts of the business exposed to UK capital government spend - well, we’ll probably see that part of the business decline. Whether this is offset by activity in regulated/private sector remains to be seen.”
Leading the pack
So what does Tyler think the UK’s largest contractor has done right to get the firm to this enviable position of stability and burgeoning order books? “Where we are different is that we have a greater range of capability than any of our competitors,” he says. “I am not saying that to put anyone down,” he adds quickly. “But we are a global player in professional services, a major construction player and a major player in support services and we have this almost unique infrastructure investment and development business. There isn’t anyone that has all of those in the same place.”
Simple, to the point and, if this year’s Top 150 contractor figures are anything to go by, pretty accurate.
Tyler in a minute
What watch do you wear?
I have no idea! It’s one my wife bought me for my birthday.
What’s your favourite city?
Name one thing you have never done!
A parachute jump out of a plane.
Not a bungee jump - a proper parachute one.
What do you never leave your house without?
If you could take one luxury item to a desert island, what would it be?
A boat. Not a little dinghy but a raft.
I would obviously then use it to escape.