As you will be aware, public spending is going to be hacked back before the private sector recovery has really begun. Emily Wright asked 15 of the UK’s largest firms how they will cope
The public sector cuts that the industry was bracing itself for have begun. George Osborne, the new chancellor, has already made more than £6bn of “efficiency savings”. Over the past two weeks it has emerged that schools that entered the £55bn Building Schools for the Future programme, but have yet to reach preferred bidder stage, are to be reprioritised by the Education Department. We also know that the appointment of contractors to the £3bn Procure 21+ health framework has been postponed.
Meanwhile, £700m of the Homes and Communities Agency’s budget has been put on hold and cuts are expected to continue in defence and planning. More bad news will be broken in the 22 June emergency Budget and the Comprehensive Spending Review in the autumn.
The cumulative impact on order books is going to be large, and will be exacerbated by the fact that so many firms migrated to public sector work to escape the sudden disappearance of much of the commercial market, and the continuing decline of the industrial sector. They could do this because the government accelerated capital spending to try to put a floor under aggregate demand in the economy. It was clear from the start that this was a temporary measure, and that government support would run out sometime round about now.
“I think some people will be in trouble. For SMEs in particular, who are already under pressure, there will be failures, consolidations and administrations to come”
Mike Peasland, Balfour Beatty
The problem is that the private sector hasn’t really come back, so there is little refuge in firms’ domestic markets. “I think some people will be in real trouble,” says Mike Peasland, group managing director of Balfour Beatty. “There have already been firms that have suffered after the Learning and Skills Council debacle and now with education being one of the main casualties it will get worse.
“For SMEs in particular, who are already under pressure, there will be further failures, consolidations and administrations to come.”
Jonathan Goring, Capita Symonds’ managing director, adds that relying on the private sector to balance the drop off in public sector work is unrealistic. “The upturn is not significant enough. Public sector work is still the only game in town,” he says.
If Goring is right, then this is going to be a tough game to win, especially as most of the firms surveyed are expecting public sector work to fall. In some cases, companies predict that public sector work will fall by as much as 25% over the next three years.
Building asked 15 of the UK’s biggest consultants, contractors and architects to reveal exactly how they expect to see their public/private sector work balances shift and explain what their strategy will be for keeping their heads above water.
Current public/private sector balance 55/45
Predicted public/private sector balance in three years 40/60
Cyril Sweett works across a wide range of public and private sectors including: education, energy, waste and utilities, health, hotel and leisure, industrial, life sciences, offices, residential, retail and mixed use, transport and infrastructure.
The firm has been expanding overseas for several years now with 1,443 projects under way across the globe; staff work out of 30 offices based everywhere from the UK to Australasia and Asia to the UAE.
Focus overseas and push ahead with work in the energy sector to make up for cuts in health and education.
“At the moment I’d say the balance will go from 55% public now to 45% or even 40% within three years,” says Derek Pitcher, the executive director of operations. “One of the main factors for lots of firms will be how long it will take for the private sector to build back up and fill the gap that we’re all going to be facing now that the cuts are being announced.
“In the meantime, we have a strategy to balance the types of public sector work we’re doing. The fact that energy and nuclear projects will go ahead with private funding is good for us as this is an area we have been building up a presence in. We hope that being in a good position to win work in this sector will balance the inevitable fall off in health and education.
“We are also benefiting from our long-term focus on expansion into the Middle East, Asia and Australasia. In terms of the private sector, things are moving in a positive direction. British Land and Land Securities are dusting off flagship schemes and we’re starting to see a steady growth in retail work.
“Private work is coming back, it’s just a question of whether it will be fast enough and in sufficient volume to balance the public sector dip.”
Current public/private sector balance 30/70
Predicted public/private sector balance in three years 23/77
EC Harris is one of the few firms in this survey that works mainly in the private sector so it ought to be in a better position than most to withstand the cuts. The firm provides 17 disciplines and works across sectors such as manufacturing, oil, gas and chemicals, property, transport, utilities and the public sector, covering everything from education and health to local government and communities work and regeneration and growth.
Focus on oil and gas businesses overseas, global expansion in Asia and a public sector work shift.
Philip Youell, chief executive, discusses the group’s strategy following the formation of the coalition. “Some time ago, maybe even a decade ago, we resolved to move into a broader spread of services, which means we have diversified now to the point where we are able to brace ourselves against the cuts. We work in capital and operational expenditure so where one is decreasing, the other is increasing, so we can just shift our focus.
“We’re also spread over regions and there are parts of the world like Asia that have not been quite so badly affected by the recession and that’s where we will be looking over the next few years. Europe is looking cool in the private sector. Investors are returning to the table, but it’s a slow process. Asia is much more buoyant and our target market is China. We’ll also be focusing on our oil and gas business in the US, which has proven more recession proof than most.
“For our public sector work, we will work up a different way of managing this side of the business. The government will be looking for ways to reduce costs and they will need help so there are opportunities for us there. We are also looking for small acquisitions to build up the services and sector coverage we think we should be concentrating on, like oil and gas.”
Current public/private sector balance 60/40
Predicted public/private sector balance in three years
Acquisitive and fast-growing, Capita Symonds is one of the biggest multidisciplinary consultancies in the UK, spanning everything from design, engineering, planning and management consultancy. The firm is well known for its success at winning public sector work, particularly in the health and education sectors.
Other than offering more services to government, the plan is to change very little. “Our work balance will probably stick at what it is for the next few years,” says Jonathan Goring, the firm’s managing director. “Public sector work is still the only game in town. We don’t see the private sector coming back with gusto. Okay, so there is a bit of an upturn, but it is not significant enough. We are not hugely interested in moving into new markets because that brings its own risks. So the strategy will be to continue with our focus on public sector work, particularly defence projects, where prime contracts are coming up for rebid soon, and healthcare, where our recent acquisition of Inventures will stand us in good stead.”
Current public/private sector balance 25/75
Predicted public/private sector balance in three years 20/80
Gleeds operates in 17 countries across the UK, mainland Europe, Asia, America, Africa and the Middle East.
As well as winning work in the commercial, leisure, regeneration and accommodation sectors, it covers areas such as health and education as well as a more specific public services sector, such as embassies and law courts. Projects typically involve refurbishing or redeveloping buildings or estates suffering from past under-investment.
Focus on nuclear and renewable energies sectors in the public sector.
Jonathan Stewart, managing director of Gleeds Advisory, says: “Areas like nuclear and renewable energies look to be key going forward and those are two areas where we have a lot of expertise, so we are looking at developing our services for offering these and to widen the sector coverage we provide.
“Geographically, we are looking at growing in Egypt and the Middle East and north Africa. I don’t see a massive change when it comes to the balance of the two sectors in terms of our work. It’s more about looking at areas to develop within the public sector and focusing on the ones most likely to grow going forward and developing them rather than reducing how much work we are doing too dramatically.
“When it comes to the private sector, I think the next year will continue to be very tough indeed, but after that we should see it building back up.”
Turner & Townsend
Current public/regulated infrastructure/private sector balance 33/33/33
Predicted balance in three years 25/35/40
This 2,400-strong consultancy operates out of 63 offices worldwide and covers 21 public and private sectors. These include nuclear, energy, health, education, power, rail, water and waste. The group also specialises in regulated infrastructure work, which is separated into a third sector in terms of public/private work balance.
It is looking to focus on the positives of spending cuts by moving further towards support services and continuing global expansion.
Vince Clancy, T&T’s chief executive, says the group’s strategy is to become “less reliant on revenue from public sector work”. He says: “There won’t be a radical change in terms of the balance of work in three years, but there will be a shift towards private.
“There are some opportunities that will arise as a result of the cuts, as all government departments and public sector clients will have to deliver more for less, so there will be work available for firms like us to offer guidance to central and local government, helping them to become more efficient clients and manage their property portfolios more efficiently.
“There will basically be a lot of outsourcing work to help them to better deliver and procure. On the private side, I think things will continue to grow, but slowly. Retail is one area to be looking at as spending has got more aggressive again.
Globally, we operate in seven regions and we have identified the US, the Middle East, Africa and Asia as the ones that will see the most growth in the next few years. This global diversity will be key in keeping us on firm ground in the coming months.”
Current public/private sector balance 65/35
Predicted balance in three years 40/60
Balfour Beatty tops our turnover rankings of contractors and makes more profit than anyone else (£270m). One weakness is its limited support services offering outside the infrastructure sector. But it is in the right areas of the public sector, such as rail and energy, including nuclear. Another plus is that 25% of its revenue comes from the US market.
To develop the business in areas including hotels and leisure, fit-out in commercial and retail sectors, and nuclear.
“The big issues for us are obviously around the Building Schools for the Future programme,” says Mike Peasland, group managing director. “Now we just have to wait and see how bad it will be in other sectors. The bottom line is that this stream of work can’t stop completely. But it will be slowed up and reduced. So there will be winners and losers. For example, in education we may see a shift towards academies. It’s all in the details.
“In the private sector, there are signs of movement in the commercial market, but it’s difficult to know how quickly this will come back.”
Bam Construct UK
Current public/private sector balance 70/30
Predicted balance in three years 60/40
Part of European Contractor Royal BAM Group, BAM Construct UK covers sectors including education, retail, mixed development, health, office and leisure.
A spokesperson for BAM Construct UK, says: “It is difficult to predict exactly what’s going to happen in terms of our balance of work because nobody knows exactly what’s going to happen. But looking at the way the public sector cuts are going at the moment, a
10-20% increase in private sector work over three years doesn’t sound outrageous. It depends on how much education is affected. I don’t think health will compensate much, as there won’t be a raft of new healthcare projects coming on stream.
“It also depends on frameworks. Thankfully we have secured preferred bidder status on two out of the four BSF projects we are involved in. In terms of the commercial side of things, you have to look at the regional picture and try to identify which areas will see the fastest
pick-up of work.”
Current public regulated/private sector balance 75/25
Predicted balance in three years
Carillion is the only company in our survey that predicts its public sector workload will rise in the next three years. John McDonough, its chief executive, said the cuts would open the door to more large-scale government outsourcing, something Carillion has become a specialist at.
To move away from pure construction work in the UK, and focus instead on support services, something it has longstanding experience in providing.
John Denning, director of corporate affairs at Carillion says: “UK construction now accounts for less than 10% of Carillion’s profit, as for the past 10 years or more we have been selective in construction, with the primary aim of retaining a strong construction capability to support the growth of PPP investments and our support services business.
We plan to shrink UK construction by 30% over the next three years, which mirrors the cuts in investment in UK infrastructure and building that the last government announced in its pre-Budget report last November and repeated in this year’s Budget.
Our strategy is to retain only sufficient construction capability to support the delivery of integrated solutions for PPP projects and for other support services customers.
Most of our UK construction work is for the public sector and this is likely to remain the case, or perhaps even increase, given that increasingly our UK construction work will be for PPP and support services customers. This is in line with the strategy we have pursued since Carillion launched.”
Current public and regulated/private sector work balance 70/30
Predicted balance in three years 60/40
The 26th biggest contractor according to Building’s 150 Top contractors of 2009 has diversified over the years and now focuses on a wide range of public, regulated and private sectors including water, rail, highways, health, education, nuclear, energy and waste.
To focus on predicted key growth areas - energy and waste in particular. Stephen Wells, Costain’s group strategy and business development manager, says: “We see our public and regulated and private sector balance focusing on energy and waste, increasing our private sector workload by around 10% in three years. But then, it is important to point out that a lot of this work will actually be furnishing the public sector. The plan going forward is to work harder to give our clients more assets for less cost. We think that offering a more joined up service, starting with front end consultancy, moving through into construction and then also delivering operations and maintenance at the end is the best way to do this. As well as energy and waste, we’ll be looking at repair and maintenance, which looks set to grow 4% over the next two years.”
Current public/private sector balance 75/25
Predicted balance in three years 60/40
Kier has one of the largest proportions of public sector work. Three-quarters of its work comes from this sector which, at first glance, could be cause for concern. Fortunately, the sectors it is in are those with the most potential for continued spending, such as nuclear and waste.
The group was chosen last year by AWE as one of two contractors that will develop a portfolio of work at the Aldermaston nuclear research centre worth £200m.
Kier also has operations in the Gulf, Caribbean and eastern Europe, which it plans to expand.
To move towards private work. Paul Sheffield, Kier’s chief executive, says that while the group’s stream of work is still dominated by the public sector, there will be a shift in focus to the private sector - although he is aware it will take time to come back: “There is a difference between what we hope will happen and what might actually happen. We want the private sector to be able to buoy the business as public sector work is cut.
“There are good signs as private work picks up, particularly in the South-east with most big cities not far behind as developers are gearing up commercial schemes ready for completion in 2012. There is a growing feeling that increasing numbers of big schemes like this will be coming through this year and next.”
UK turnover £99m
Current public/private sector balance 53/47
Predicted balance in three years 46/54
BDP has more than 1,000 staff working across 16 studios in the UK, France, Ireland, Netherlands and UAE. The practice’s sectors include health, education, workplace, retail, urbanism, heritage, housing, transport and leisure.
To work hard to win remaining public sector work in the UK and to focus on international expansion in the UAE, Middle East, China and Canada.
Peter Drummond, chief executive, says he is confident the public sector build programme won’t cease completely and that opportunities will still exist for the best firms: “I see a future in hospital developments. I also think the schools programme will continue in some form, although I concede it may refocus - perhaps towards the academies model. The public sector work won’t disappear, it will just become harder to win. On the commercial side, retail is starting to move again.
“Then there is international expansion. We have just opened offices in Abu Dhabi, Delhi, China and Canada. This sort of diversification should help pick up some of the slack when public sector work in the UK is squeezed.”
UK turnover £16m
Current public/private sector balance 75/25
Predicted balance in three years 50/50
Another architect with a high proportion of public sector work in relation to private, HLM Architects focuses on defence, justice, education and health, but also covers commercial and homes.
To reduce reliance on the public sector by exploring more private work opportunities while retaining as much public sector work as possible
David Cafferty, a director of the firm, says: “We are focusing on areas of the public sector work least likely to shrink and simultaneously develop our private sector business. There have not been many schemes coming out of the ground over the past year or two and so there is now a shortage of supply, so we’re seeking out opportunities as a result of this.
“We have just submitted plans for a £50m business park scheme in Windsor and have exchanged contracts on a mixed-use site in Greenwich. Everything is pointing to the fact that the private sector is becoming more bullish and there are positive growth signs - especially in commercial and mixed use.
“Schools are bound to slow down, but we have to remember that population growth will mean a requirement for more school places and this demand will need to be met with buildings, especially in metropolitan environments.”
UK turnover £19m
Current public/private sector balance 65/45
Predicted balance in three years 45/65
This practice has offices in the UK and Cyprus and works across sectors including residential, defence, education, transport, hotel and leisure and urban design and masterplanning.
Push ahead with public sector work in areas where the firm is already well established while trying to win more private sector jobs to balance the squeeze.
Jonathan Hill, chairman, says: “We’re all still in a state of limbo and I think we will be for some time. But for us, no matter what happens, there will always be work to be done. It will just become more competitive to win it. Projects are design-led and we are architects who deliver on value and on time and we will build on that past reputation and experience to keep winning projects in the education sector and defence.
“There will be cuts, but there is no doubt that the education portfolio needs to carry on being developed in some form. With defence, there is likely to be a review and then continued spend - we are still moving troops around and they still need single living accommodation. So the strategy is to drive forward with the public sector work we have experience in while looking at private sector opportunities such as residential, hotels and hospitality and interiors, which are all looking strong.”
UK turnover £21m
Current public/private sector balance 60/40
Predicted balance in three years 40/60
Sheppard Robson has more than 220 staff working in London, Manchester and Glasgow. The practice has always been in the education sector with a swath of school, university and college projects. It also covers sectors such as residential, healthcare, retail and hotels.
To reassess public sector work options to match the areas most likely to avoid major cuts, prioritise existing clients to try to secure repeat business and to focus on more private sector opportunities.
Tony Poole, a partner at the firm, says: “We have never had so much public sector work. We see this dropping by about 10% to make up 50% of our workload in a year and then dropping further down to 40% within three years. We are seeing significantly more private work coming back on stream and we’ll look into offices.
“Over the past 18 months we haven’t seen much of this sort of work - there have been some fit-out and conversion jobs but the ones coming up now are much bigger and there is a move to design schemes ready for development and completion by about 2013.
“On top of that we’ll be focusing on other areas like retail and residential where we have added experts to these teams. We will build on our reputation and part of the strategy for this has been to be loyal to clients. We have planned ahead by ensuring that our existing clients are given priority by taking decisions such as not getting involved in Olympics work. Hopefully we have picked the right clients to invest our time and expertise in and we will reap the rewards.”
UK turnover £18.2m
Current public/private sector balance 29/71
Predicted balance in three years 30/70
The practice has historically had a strong private sector workload, which it has managed to maintain reasonably well through the recession. It means it is in a good position as public sector cuts begin. Key sector areas 3D Reid covers include airports, offices, residential, retail and leisure, health and education.
To diversify in both the public and private sectors.
Graham Hickson-Smith, head of business development, says: “Strategically we are aiming to diversify our public sector work in the UK and internationally through the adoption of PPP models in emerging markets, predominantly in the education sector.
“However, private sector work will continue to form a larger part of our portfolio.”