Delayed recovery Another year to wait

Exploratory work is currently underway on the new Brenner Tunnel, the final base tunnel (at valley floor level) envisaged under the Alps as part of the Trans-European Transport Network (TEN-T) project.

DELAYED RECOVERY

The eurozone debt crisis will delay the recovery in Europe’s construction market for at least another year. Chris Sleight reports.

Forecasts for the construction industry made 18 months ago were confidently predicting a rebound in activity in 2012, following the recession that began at the end of 2008 with the global banking crisis. However, the high national debt levels that followed on from the crisis and pushed the eurozone to the brink of collapse towards the end of last year look certain to delay the recovery in construction.

Unlike the broad European economy, which bounced back into growth in 2009 and is now tipping back into a mild recession, the construction sector never got its head above water. So it would be inaccurate to say it has seen a double-dip recession, but with negative growth for four straight years, including the crushing falls of 2009 and 2010, the industry could be said to be in a depression.

But as ever, a broad headline figure for Europe hides a huge range of different national dynamics. The most sickly construction markets are of course the southern and other peripheral countries that have the worst debt problems. In contrast, Germany, the Nordic region and parts of central Europe are showing respectable growth.

Specialist forecasting body Euroconstruct says overall construction activity in Europe will shrink 0.3 per cent this year. This contrasts to the 1.3 per cent growth the group expected in its summer 2011 outlook, before the debt crisis really hit home. This follows on from the 0.6 per cent contraction seen last year – more or less what was expected without the sovereign debt issues.

The expectation now is for a return to growth in 2013, with a 1.8 per cent increase in activity. An moderate acceleration in 2014 should see the value of the market return to about €1300 billion, so even if this recovery does materialise, the absolute value of the market will be a big step below what was seen half a decade before.

As one may expect in the current climate of austerity across Europe, it is the publicly funded parts of the industry that are seeing the biggest cutbacks. First and foremost this means civil engineering work, a segment that stayed afloat well throughout the recession thanks to government stimulus spending. In addition to infrastructure projects, the market for publicly funded buildings such as schools, hospitals and municipal structures is also looking weak.

Growth prospects for both the residential and private non-residential markets are far from spectacular, due to the atmosphere of economic uncertainty that the eurozone crisis has generated. However, the weak prospects of the new-build sector are contrasted by a relatively bright outlook for repair & maintenance activity.

Chinese interest

In terms of talking points, it has been a long time since there was an issue such as the saga of Chinese state-owned contractor COVEC’s ill fated attempt to break into the European market. COVEC won a contract to construct a 50km stretch of the A2 motorway in Poland in 2009, a high-profile project,

which was due for completion ahead of this summer’s Euro 2012 football championship.

To say the win was controversial would be a huge understatement. COVEC’s bid was less than half the client’s target price, and was lower than all other bids by a huge margin. The reasons given for this – cheaper materials and equipment sourced in China, along with cheaper design costs – were suspicious, and so it proved, when COVEC was thrown off the contract in June last year for various breaches of contract, including non-payment of sub-contractors and dubious claims. For its part, COVEC said it was its own choice to terminate the contract, but hasn’t elaborated on why.

When the A2 work was originally awarded, there was a genuine fear in the European contracting community that it was a sign of things to come – that state-subsidised Chinese contractors would start to undercut them in their own markets to buy share. However, since the summer, the message has been, “We told you so.”

The A2 contracts have since been re-let to European consortiums, but it remains to be seen if the road is ready to bring fans to the Euro 2012 Football Championships. As well as damaging COVEC’s reputation it has left the client, Polish roads authority GDDKiA, looking foolish and naive for accepting the bid in the first place.

It has been a disastrous episode from the Chinese contracting fraternity’s point of view. The intention three years ago may have been to establish a credible European presence; COVEC’s bungling has done untold damage. It will be a brave public authority that awards a cheap construction project to a Chinese contractor in the near future.

In contrast to this, China’s construction equipment manufacturers are making headway in Europe through a string of acquisitions.

The first of these came in 2008, when Changsha, Hunan Province-based Zoomlion acquired concrete mixer, pump and placing boom manufacturer Cifa. Although Zoomlion already made many of the same products as Cifa, the acquisition was justified in terms of adding a premium brand and extensive global distribution network to the Chinese manufacturer.

The start of this year has seen Sany, which is also based in Changsha and competes head-to-head with Zoomlion in many products, acquire German manufacturer Putzmeister. Putzmeister makes almost exactly the same range of machines as Cifa, but is reckoned to have a larger market share. Its acquisition by Sany, for an undisclosed sum, creates an undisputed number one in the sector, with a global reach and a range of premium products (made in Germany) to appeal to developed world contractors, as well as mid-range Chinese machines for emerging markets.

Another significant acquisition has been earthmoving equipment and crane manufacturer Liugong’s purchase of Polish dozer manufacturer HSW. Like the Sany and Zoomlion deals, this has several strategic strands. First, it adds a new range of products to Liugong’s portfolio; second, it adds a European manufacturing plant; third, and perhaps most significant in crowded markets like Europe and the US, it adds a well-established network of distributors and an after sales and service infrastructure.

The PGE Arena Gdansk in Danzig, Poland is a 44000-seater arena built for this year’s Euro 2012 football championships.

Competition issues

The issue of anti-competitive behaviour never seems far away when it comes to the construction industry, and over the last decade or so there have certainly been some significant cartels exposed in Europe. The worst of these have been among materials suppliers,

Preparations for the 2014 Winter Olympics in Sochi, Russia is providing a construction bonanza. Pictured is a model of part some of the new venues and Olympic village in the coastal region.

where a relatively small group of companies have been able to collude in various ways to keep prices high.

And cartels have been exposed in the much more fragmented contracting sector, most notably in the Netherlands a decade or so ago, when virtually every contractor in the country was caught up in a series of pricefixing scandals.

The last year has seen a few more anticompetition cases exposed around the region, but nothing on the scale of those seen in previous years. There have been a handful of cases that have focused on the asphalt production and laying industries in Scandinavia, and a similar case in Spain. There has also been an issue in Finland, where competition authorities have taken the unusual step of blocking a merger, again in the asphalt sector.

The UK presents an interesting case in point about how anti-competition issues have shifted. First the much-vaunted case brought by the Office of Fair Trading (OFT) several years ago against a large group of contractors has been rumbling through the various stages of appeal.

The upshot has been that fines have been dramatically reduced from the huge £100 million+ penalty initially trumpeted by the OFT. Kier for example, one of the most heavily penalised companies, went to a competition tribunal in March last year and, along with other guilty parties, successfully had its fine reduced by 90 per cent. Overall, the group of six contractors saw penalties cut from an initial £42 million to just £5 million.

This reflects the fact that the offences they were found guilty of – mostly cover pricing – are not the most serious forms of anti-competitive behaviour. The practice involves submitting a high bid for work to make sure it is not won. Companies have been known to do this when they are too busy to take a job on, but don’t want to be ruled out of future tenders. Arguably, the client still gets the cheapest price available on the market.

Although cover pricing is illegal, a statement from the appeal tribunal shows authorities do not feel it is too serious an infringement: “The penalties imposed by the OFT on each of the appellants for ‘simple’ cover pricing were excessive given the fact that the practice was long-standing in the industry and widely regarded as legitimate,” said part of the ruling.

But that is not to say the OFT does not have a role to play in the construction industry. It is currently scrutinising a proposal from Lafarge UK and Tarmac UK, which would see the two businesses roll-up their British interests into a 50:50 joint venture. However, the view from the OFT is that this would reduce competition too much in the aggregates and cement sector, and it has provisionally ruled against the deal. It may still go through, but if it does, some divestments will be required. In terms of industry prospects, the European construction sector is in for a tough few years. Publicly-funded work will continue to be scarce as austerity measures bite across the region, and the general economic ill-health will mean growth will be elusive. However, it is always a mistake to just look at overall figures for Europe. Some countries will continue to offer good opportunities and, in the case of major markets like Germany, those could be significant. n

In construction terms, the major challenge in getting Sochi ready in time is the 50 km combined road and rail link from the coastal Olympic Village up into the mountains where downhill events will take place.