Building introduces this year’s Top European contractors and housebuilders league tables by finding out why even the most successful firms need to be preparing for the worst
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This time last year, the European market was starting to teeter. Greece and Ireland had already been bailed out, Spain and Portugal’s economies looked increasingly unstable and the full impact of the public sector spending cuts was being nervously anticipated. No one doubted there would be a tough road ahead. But a tough road so severe it would lead to the potential collapse of the eurozone within just 12 months? The situation has escalated faster and more dramatically than most people feared.
The severity of the eurozone crisis was compounded last week with the downgrading of the credit ratings of nine European countries including Italy, Spain, Austria and France - which was stripped of its Triple A credit rating by Standard & Poor. The move threw European, and global, markets into fresh panic over the stability of the eurozone. Foreign secretary William Hague warned of a potential meltdown and said the downgrading proved that Europe was, by no means, “through its problems.”
For European contractors more specifically, this year’s Top European contractors league indicates the winners and losers (pages 40-45). But it is worth remembering that this is all against the backdrop of an unprecedented eurozone crisis and a rapidly changing market that makes it nigh on impossible to predict what might happen next. As Andrew McNaughton, chief operating officer at Balfour Beatty says: “I guess the main question is how we will even define mainland Europe by the end of 2012?”
As the situation escalates, every possible scenario is on the cards, including the collapse of the euro which would have catastrophic effects on firms worldwide.
Last week Building revealed that companies were scrambling to rewrite contracts to ensure there was an allowance within them to switch currencies in the event of the loss of the euro. Richard Threlfall, UK head of infrastructure at KPMG, said at the time: “There is an issue that should be on the radar of all construction companies as they analyse the threat to the euro, and that is the potential impact on their supply chain. Without a clause allowing a conversion into another currency if necessary, if the existing currency ceases to exist, the contract will become frustrated and hence null and void.”
Here we look at the state of play among Europe’s biggest contractors in a volatile market before investigating the likelihood of the fall of the euro and the impact it could have on the industry.
Survival in a tough climate
There has been little movement among the top 20 firms in the league from last year with French giants Vinci and Bouygues holding firm in the top two spots and German contractor Hochtief at number three posting an impressive 50% rise in profit.
While there has been minimal change in the specific positioning of the top firms, they have collectively developed over the last 12 months more or less in line with geographical market conditions. The biggest loser in the top 20 is Spanish firm Acciona which posted an 86% decrease in profit while German firms have performed particularly well with Bilfinger Berger reporting a 103% increase in profit.
Any firm affected by the possibility of the euro failing should have developed a contingency already
Rick Willmott, Willmott Dixon
Moving down through the rest of the tables, the biggest drops in profit affect Portuguese and Italian firms. Portuguese firm Mota Engil, ranked 43rd, saw a 49% drop and Zagope, also Portuguese and ranked 103rd posted a fall of 79%. Italian firms Coopsette, Trevi and Unieco, saw 70%, 43% and 37% profit drops respectively.
German, Swedish and Dutch firms performed well along with Balfour Beatty which saw profit up 48% despite tough market conditions and public sector cuts in the UK. This is most likely due to the fact that the firm has an international reach and doesn’t focus too much on work in Europe.
Indeed, most of the top performing firms are most likely to weather the European economic storm not just because they are big enough to have financial stability, but because their size means they are already exploiting other, less volatile markets.
John Stanion, chief executive at Vinci Construction says: “Europe is our historical base but the outlook for growth in construction in the current economic environment is uncertain. While growth is depressed in Europe, recovery will come and the rest of the world is still on a relatively sound growth track.”
And Balfour Beatty’s McNaughton adds: “With economic uncertainty prevailing in Europe it is even more important for contractors to ensure that they are well positioned to take advantage of the opportunities in other emerging markets.”
The future of the euro
But what would happen if the situation got so bad that the euro was no longer even in existence?
As Building revealed last week, most existing contracts are silent on this point, according to lawyers Dominic Helps from Corbett & Co and Fiona Rossetter of Dundas & Wilson. So unless firms work together, and fast, to add a clause in to cover the chance of a currency collapse, then they are risking costly renegotiations affected by exchange rates that would take time and be difficult to agree on - putting pressure on margins.
Most international contracts state that issues of currency are to be sorted out by the parties involved. So it is down to individual firms to “get together, sort it out and put something in the document”, according to Helps. But how many companies are even aware that this could be a problem? And what exactly does contingency planning involve?
How real is the risk?
The fall of a currency would have such a colossal impact that there are question marks over the likelihood of things getting to that stage. But the situation in Europe has now reached such dire straits, with debts topping €10 trillion, that the loss of the euro is a real possibility. As the debt crisis has engulfed Greece, Ireland and now Portugal, contingency planning has become vital.
“Things in the eurozone have got sufficiently serious now for firms to be putting together some sort of contingency plan in case the euro does fall,” says Helps. Charles McBeath, managing director of structural engineer Ramboll UK, puts it more bluntly, saying that anyone not preparing this possibility is “absolutely crazy”.
For those that don’t protect themselves, there will be no safety net to fall back on: “It looks as though most existing contracts are silent on this issue of currency switching,” says Fiona Rossetter, senior associate in the construction department at law firm Dundas & Wilson. “So the most likely outcome if a currency ceased to exist would be renegotiation. Assuming this was part of a number of contracts then people in the middle would still be obligated to deliver what they have agreed legally with those further up the supply chain. So when you’re revaluating costs and currencies - which would all depend on exchange rates - things could get very complicated.”
KMPG’s Threlfall adds: “This doesn’t just apply to building contracts, of course - but to any based on euros. The outcome could be catastrophic.”
The onus to protect against a currency collapse lies with the individual companies and there is no evidence to suggest that the government would get involved or amend legislation. A spokesperson for the Department for Business, Innovation and Skills said it would be “up to the individual firms” to put an agreement in place.
But how many firms are actually doing this? Threlfall says he is aware of several Spanish companies putting clauses into contracts allowing for a transfer to another currency - most likely dollars - but that it wasn’t yet widespread practice. Ramboll’s McBeath says that most of the contractors he works with have been looking into changing their contracts too, though he would not be drawn on names. He adds that he would be “amazed” if it wasn’t at the top of the list of priorities for every firm dealing with European contracts or suppliers.
The response to this issue among the top European contractors is mixed. ISG confirmed it was reworking its European contracts to prepare for the potential collapse of the euro. Willmott Dixon chief executive Rick Willmott says: “Any firm affected by the possibility of the euro failing should have developed a contingency already. It should be top of their agenda.”
But a spokesperson for Balfour Beatty - the largest UK-based European contractor - says: “Adding a clause into contracts to deal with the potential loss of a currency is quite a usual thing in the Middle East. But not in relation to the euro.”
Whether or not the worst happens, planning for it is always preferable to being taken by surprise. And legal and financial experts alike urge construction companies to ensure they have a strategy in place. As Helps says: “Better to put the work in now and pull together a plan between yourselves on projects than wait for the courts to potentially have to sort out the mess.”
Order and chaos
Dominic Helps, international construction law expert at Corbett & Co, explains how the UK courts might respond to cases requiring a switch in currency in the UK
The disappearance of the euro could cause major problems for ongoing international construction and engineering contracts. I am talking here about contracts involving parties from more than one EU member state, or involving a non-EU party, which provide that payments must be made in euros.
Taking English law as an example, where the type of performance envisaged in the contract becomes impossible - as payment in euros would be if it ceased to exist - the courts tend to treat the contract as having been frustrated and at an end.
No doubt the UK courts would appreciate that that is the last thing anyone wants, and I suspect they would work hard to find the appropriate legal tool to avoid that result. My money would be on a ruling that a term should be implied into the contract providing a mechanism for a substitute currency, although I can foresee difficulties around how the choice of currency would be determined.
I am sure that many of the more sophisticated players internationally will be amending their contracts to deal with the possible currency failure.
I would also expect the European Council of Ministers to be doing a similar thing. I imagine they would be looking at legislation dealing with a substitute currency and preventing contracts from being frustrated by the collapse of the euro.
View from the Mainland
Martin Everding from German law firm Spieker & Jaeger considers how national law might deal with the case of an ongoing contract between a German seller and a buyer from another eurozone or EU member state, if the euro was to collapse
Looking 10 years back, this already happened the other way round when the good old Deutsche mark was no longer legal tender. German law provided for an automatic conversion of DM into euros at a rate that was predetermined. It also stipulated that the introduction of the euro was to be seen as currency conversion only, rather than a currency reform. Thus, the continuity of contractual relationships was upheld. To make things clearer the EU directive said that such conversion must not be taken as reason for frustration of contract claims as per section 313 of the German Civil Code.
So the easy answer is: it would work like that in reverse mode. The EU and the German government would come up with legislation that would determine to convert euro debts and denominations back into DMs and establish that this would not justify contractual claims and remedies.
However, it might become interesting if, all of a sudden, we had to accept Greek drachmas or Italian lira as payment for goods or services. The first step would be to find out by which law the contract is governed. Failing contractual agreement, the EU and national laws of conflicts apply. German law would rule that the place where the payment is due determines the currency in which the payment is to be made. So, if the German seller agreed that the payment be made into the bank account of his Italian subsidiary, he might end up receiving Italian lira.
I would therefore recommend that questions of choice of law and place of payment get some more attention by companies acting internationally in order to avoid surprises.