european construction: Continued growth – but

EuRoPEAN CoNSTRuCTIoN: CoNTINuED GRoWTh – BuT RISKS REmAIN hIGh

The European construction sector has enjoyed a period of good health over the last three years, but too often the industry has made the headlines for the wrong reasons.

Growth in the European construction sector moved at a good clip from 2016 to 2018 according to the Eurconstruct group of economic forecasters. The fastest expansion was in 2017 when construction output rose by 4.1 per cent, with the rare occurrence of the 19 largest national construction markets in Europe all growing at once, some by impressive double-digit amounts.

This period was arguably the first time the segment has been in good health since the global economic crisis a decade ago.

Growth is expected to be more subdued over the next few years, but Euroconstruct sees the expansion remaining at 2.0 per cent this year before slowing in 2020 and 2021 as rates of GDP growth dip and the European economy slows.

The surge in output over the last few years was driven by high levels of new housebuilding, particularly in Germany. However, with that force now spent, activity in the residential building market is expected to pivot more towards repair & maintenance work from this year onwards.

The non-residential building market has been more subdued, partly because a large part of this segment is driven by under-pressure public sector budgets. In the private sector, a big portion of this segment is accounted for by offices. This is an area which is expected to suffer particularly badly in the UK following Brexit due to the anticipated migration of jobs, slowing of the economy and the decrease in investment.

On the positive side, the outlook for the civil engineering segment is for strong and perhaps increasing growth. Although this is an area which is also heavily influenced by national and local government budgets, there is money available for road and rail renovation in particular around Europe. In addition, the sector benefits from significant EU-level funding, the main vehicle for which is the Connecting Europe Facility (CEF).

CEF applies to a number of sectors, the most important for construction being the Trans-European Network transport (TEN-T) schemes, for which €24.05 billion is available in the CEF budget for 2014–2020. At just over €3.4 billion per year, that is not a great deal in the context of total European construction output, which the European Construction Industry Federation (FIEC) put at €1.28 trillion in 2016.

However, the key point about CEF is that it provides support for schemes which might otherwise not be viable. According to the European Commission website, CEF funds were used to support 75 projects across Europe. The level of support from CEF tends to be around 20 per cent of total project costs making it a significant stimulus for the industry. CEF projects are not necessarily large but they often are. These major schemes have significant positive impact for the industry as a whole.

engineers are exploring the feasibility of a floating tunnel across the Sognefjord in Norway. Infrastructure opportunities

Europe is a developed region with a largely complete infrastructure network, so the industry tends to be focused on repair & maintenance, rather than major new build schemes. This means that when a major project comes along it is great news for construction companies. Certainly the UK’s High Speed 2 (HS2) project falls into this category. With the main civil engineering work due to get underway this year, this new rail link between London, Birmingham and beyond should give the industry a significant lift. Having said that, there was concern at the start of this year that HS2 could be cancelled despite design and enabling works being underway. Liz Truss,

the UK’s Chief Secretary to the Treasury (a senior ministerial position) seemed to signal the scheme could be scrapped under a government spending review she is leading.

Elsewhere in Europe the news is better for schemes like the Grand Paris project to extend and better connect the Paris metropolitan area. Among the construction elements are three new metro lines comprising 200km of track and 75 stations to be built at an estimated cost of €32.5 billion.

Another key project moving slowly towards implementation is the Fehmarn Belt Fixed Link, an 18km tunnel in the Baltic Sea to link northern Germany to the Danish island of Lolland. Conceived in the early 2000s, the tentative plan at the time was for the link to be completed in 2018. It says something about the difficulty of advancing such projects that the current timeline is for construction to start in 2020, with completion in 2028.

Money is of course a major concern on a project this size. In 2009 the costs, which were to be met predominantly by the Danish government, were estimated at DKK 42 billion (about €5 billion). The latest estimate is DKK 52 billion (about €7 billion) including a reserve.

Another significant project in Northern Europe is the Stockholm Bypass scheme, which broke ground in 2015 and which will see some 21km of major roads – 18km of which will be in tunnels – added to the city over ten years to alleviate traffic.

And besides these major schemes there are others around Europe on the drawing board or moving towards execution. These include a 50km tunnel in the Baltic between the Finnish and Estonian capitals of Helsinki and Tallin, which is currently at the feasibility study stage. Also under consideration is the highly experimental concept of a floating tunnel across the Sognefjord in Norway.

It is no coincidence that many of these major schemes are in northern Europe. Although returning to health, the construction markets in southern Europe are not what they were in the 2000s prior to the global crisis, and there is a marked lack of major schemes. The causes are relatively weak economies and a lack of the EU funds which were a huge driver of growth in the 1990s and 2000s, but which have since been refocused on newer member states in central and eastern Europe.

Drone technology has potential in the construction industry for applications such as surveying, particularly of remote sites. embracing this, Austria’s largest contractor, Strabag, has set up a new business unit to handle digital surveying and unmanned aerial vehicle (uAV) opportunities.

making headlines

Despite a good business climate, the construction sector remains dogged by familiar problems. The low margin and litigious nature of construction contracting is a constant issue for the industry, which can contribute to corporate failures. High-risk/low profit contracts combined with excessive debt contributed to the UK’s second biggest contractor, Carillion, falling into bankruptcy just over a year ago. Meanwhile in Italy, one of the country’s largest general contractors Astaldi filed for protection against its creditors in October having already sold off assets to shore-up its financial position. It had been in difficulty since November 2017 following a €230 million write-down on a major Venezuelan scheme.

Meanwhile, Condotte d’Acqua, another large Italian contractor, secured a €190 million government bailout in December to stave off bankruptcy as a result of its huge debts. Incidentally, the company was the original builder from 1963–1967 of the Morandi Bridge which collapsed in Genoa in August last year killing 43 people. The causes of the tragedy are still being investigated. Some theories point to a structural failure due to corrosion – a lack of proper maintenance in other words – but a landslide or even a lightning strike may have triggered the collapse.

Back in the UK, both Kier and Interserve have been under huge pressure to cut their debt, while Spanish contractor Ferrovial is believed to be looking for a buyer for its UK subsidiary Amey following a cost dispute on a long-term road maintenance contract in Birmingham.

The persistent problem for contractors is that because margins are so slim, writedowns, delays or cost overruns on a single major project can be fatal. These were major factors in both Carillion’s and Astaldi’s downfalls, and history is littered with many more examples – overruns and disputes on Wembley Stadium took down Australian contractor Multiplex, while a succession of losses in the late 1990s and early 2000s forced John Laing to sell its once mighty construction business to much smaller rival O’Rourke for a humiliating £1.

But doing well can have its downsides too. The UK housebuilding sector has enjoyed strong growth over the last three years. This led to Jeff Fairburn, the chief executive of one of the sector’s largest residential building specialists, Persimmon, receiving a £75 million (€83 million) bonus in 2018, making him the UK’s highest paid executive. The payment was particularly controversial as some of the houses Persimmon builds receive partial government funding under a scheme to help first time buyers afford their first home.

In what could only be described as a PR disaster, Mr Fairburn walked out of a live TV interview when quizzed about his bonus, and was asked to resign by the company’s board as a result of the furore.

So while the European construction industry is in reasonable health and offers opportunities, companies in the sector can often be their own worst enemies. n