We once again hosted our yearly European Construction, Engineering & Infrastructure Roundtable in December 2017, for the third time in Madrid.
The Spanish capital remains a very appropriate venue for our flagship event. Spain feels like home for infrastructure and the Spanish construction sector has started to grow again.
We discussed several European and global developments in our sector. “Cautious optimism” is the best way to describe the mood prevailing at the conference.
With the modest growth rate of our sector in Europe of 2% to 3%, we still have a long way to go to make up for ground lost over the last decade or so. The global growth rate is not much higher: the compound annual growth rate of the world’s top 30 construction companies between 2014 and 2016 was over 3%.
Optimism was further tempered by “four worries,” two of which are political: the uncertainties represented by both the Trump presidency and Brexit. Two other worries are money supply — it is an illusion to think that reversing quantitative easing (QE) by the central banks will not have a negative impact — and technological development.
We analyzed more specific issues, too. Various speakers, for example, expressed their views on the trends in project financing and infrastructure M&A. They stressed the need for timely refinancing and for flexibility in bank financing, especially in the case of PPP deals involving long-term commitments for building, maintenance and management of large infrastructure projects.
We also discussed various chronic issues and megatrends such as the skills shortage, low productivity and margins, a persistently high rate of project failures, the challenge posed by competition from Chinese companies, digital disruption and increased political volatility. One of the conclusions was that Europe needs to shape up when it comes to embracing digital technologies.
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At the 2014 conference, predictions of Spanish officials that their country’s GDP would grow at an annual rate of 3% over the next few years were greeted with some skepticism. However, Spain delivered.
The Spanish economy, infrastructure
Since 2014, Spain’s GDP growth has been around 3% a year and consistently higher than the average in the Eurozone. Pilar Más from the Spanish Ministry of Economy, Industry and Competitiveness explained that in 2018, too, a healthy growth rate of 2.3% is expected.
Spain has gone a long way in the reform of its once-rigid labor markets and has reduced macroeconomic imbalances generated by the deep economic downturn of 2008–2012. Over the last five years, Spain has significantly reduced the government budget deficit (according to expectations, it will fall below 3% of GDP in 2018), the stock of private debt as a percentage of GDP and the unemployment rate.
However, as acknowledged by Más, Spain has some important challenges to deal with.
Although the unemployment rate has fallen sharply from a staggering 26% in 2013, at over 15% it is still much higher than before the onset of the crisis and well above the average for the Eurozone. Furthermore, the Spanish economy is still characterized, on average, by a low rate of productivity which, according to Más, should be raised by efforts in the areas of education, innovation and general business climate.
In Spain, the construction and engineering sector is finally climbing out of a deep hole. After the construction bubble burst, the number of people employed in the sector and its contribution to GDP roughly halved between 2007 and 2015.
Investment in construction and engineering plummeted, as did real estate prices. Only recently, a modest but encouraging recovery has set in. According to José María Piñero from SEITT, in 2016 investment in the sector in Spain increased 2%, compared with 2015, and this increase is continuing in 2017.
After these long years of under-investment, the need for significant investments in public Spanish infrastructure is high. "“We have to go towards PPP (public private partnership), there is just no room in the budget for enough public investment in infrastructure.", says Piñero.
When the economy is going relatively smooth, even seasoned business leaders sometimes seem to forget that upswings in the economic cycle are necessarily followed by downswings.
Financing projects and valuing assets: prepare now for a less bright future
During the current ease of financing construction and engineering projects, there is an abundant supply of cheap funds. García of Globalvia emphasized that investors and companies should seize this situation to refinance their long-term commitments at historically very attractive rates, before the financial going gets tougher again.
Referring to PPP, he said: “Getting financing of 22 or 23 years for concessions that run 25 years is now relatively easy. Seven years ago, it was very different, and it may be different in the future. Central banks are already changing their tune. Refinancing now should just be part of the best practice in business of minimizing the risks that are beyond your control.”
García added that, in this endeavor to reduce risks, companies should also insist on flexible conditions in the financing offered by banks or other financial institutions: “Infrastructures are living animals. During the 25– or 30– year lifetime of a PPP concession, political, social or economic conditions may alter radically. Therefore, we need to be flexible, but so should the financial institutions offering us financing.”
M&A activity in construction and engineering has been on the rise, and Scott Kolbrenner of Houlihan Lokey expects it will continue to rise in 2018: “Listed share prices in the construction and engineering sector have gone up significantly. Sometimes the multiples supporting these prices have outpaced a particular company’s organic growth prospects, so they look to M&A to augment organic growth. In addition, there is a significant influx of private equity looking to put money to work by investing in the sector.”
Some speakers warned against seeing M&A as an easy answer to challenges the sector is facing, such as the competition of giant Chinese companies.
“Go West” is currently the motto for many European construction and engineering companies. In recent years, we have seen more investment and M&A activity by European players in the US than the other way around.
Beyond Europe: opportunities in the Americas, challenges from China
Ferrovial is a company that clearly prioritizes the US market when it comes to PPP projects for roads. In the words of Ferrovial’s Ernesto López Mozo: “In the Americas, one of our competitive advantages vis-à-vis other European companies is our knowledge of the US market. We continue to see the US as a great opportunity. If we have a choice of where to deploy our limited capital resources, we tend to go for the US.”
Gideon Tilburgs of John Laing also expressed confidence in the US and Canadian markets: “We are not just active in roads in North America, also in light rail, and we are interested in broadband and renewable energy. The current Trump Administration may reduce incentives for renewables, but at state level a lot is being done.”
Further south, Chile was mentioned by various speakers as the most attractive place to be in Latin America. The professional attitude of the Chilean Government and its public employees was highly praised.
When discussions turned to China, talk was not about opportunities but about challenges. Speakers stressed that Chinese companies tend to have advantages over their European competitors in global construction and engineering markets.
A recent EY survey of the impact of technology on the construction sector — conducted in late 2017 — found that 64% of respondents believe digital solutions are absolutely vital to their company’s future.
Megatrends and challenges: adopt new technology in time, embrace digital innovation
Digitally enhanced technologies and products already widely used in the sector include state-of-the-art ERP systems (enterprise resource planning), cloud solutions, analytics, drones, robotics, handheld technologies and 3D BIM (building information modeling). Factors most often mentioned as making the adoption of digital solutions more difficult include lack of integration between systems, lack of trained staff in the area of digital technologies, difficulties in obtaining buy-in for adoption of digital technologies (e.g., skepticism regarding the usefulness of new technology among staff) and clients’ unwillingness to pay for the extra costs of digital solutions.
At the conference, speakers agreed that the construction and engineering sector is generally late to the party when it comes to adopting new technologies. Various speakers presented their strategies for improvement and for fostering the use of new technologies and in-house innovation in their companies.
Taking a proactive stance in the digital innovation of the sector is an important task for all major companies in our sector. Connecting digital innovation in the office and lab with the practical reality in far-off building sites is one of the main challenges, as is the need to get buy-in for digital initiatives.