There’s work abroad: What are you waiting for?
Foreign clients are crying out for our construction expertise, says the government, but it appears their appeals are falling on deaf ears. Katie Puckett looks at why the UK has fallen behind its international competitors
UK construction has a long and proud history on the world stage, most recently highlighted in Danny Boyle’s Olympics opening ceremony. But his inclusion of the Victorian engineers who led the world in the industrial age contrasted with the global stage today. British engineering and architecture is still renowned and our consultants will be familiar names to many in the global audience. But British builders — with a few notable exceptions — have retreated. Arguably, we have less of an international contracting presence than ever.
It’s become a source of frustration to those in government responsible for promoting British exports overseas. After almost a year at the helm of UK Trade & Investment, chief executive Nick Baird made his feelings plain in an interview with Building magazine this summer, urging UK contractors to contribute more to UK overseas trade. Foreign clients are, he says, clamouring to be able to put UK contractors on their tender lists, while they lag behind both UK consultants and competitors from other nations in selling their services overseas.
With economic growth prospects concentrated in emerging markets in Europe and further afield, combined with our expertise in building infrastructure, or education and health projects, this is a huge missed opportunity. Possible reasons for contractors’ stay-at-home mentality — such as the difficulty of operating far from the UK supply chains, legal systems and payment certainty — are easy to list.
Yet these concerns do not seem to be such a barrier to those from other countries: French contractors such as Bouygues, for example, are well-established in sub-Saharan Africa and Germany’s Hochtief is active from Rwanda to Russia.
Neither were British firms themselves always so cautious. Many of our best-known contractors have long histories of global projects, only pulling out of previously key markets in the last 20 years. “Over time, we have had less and less representation on the world stage, while German, Swedish, French, Spanish, and Italian firms are very active internationally,” says Graham Hand, chief executive at British Expertise, which puts UK would-be exporters in touch with overseas clients.
This withdrawal from the world stage hasn’t gone unnoticed by our European counterparts. Frank Kehlenbach, director of the European International Contractors organisation in Berlin, has not only spotted the trend, but dug out the membership lists to prove it. “I joined the EIC in 1997 and for that year there are companies like Bovis, Bywater, John Laing, Edmund Nuttall, Taylor Woodrow. Until the 90s, I would say that while UK contractors were not the largest number, they were well represented. But within 10 years, from 1990 to 2000, the number got smaller and smaller. For some reason, British contractors lost interest in international business.”
As Kehlenbach points out, this is all the more of a conundrum because UK firms have a significant head start. “The British have a huge language advantage — the whole world speaks English. International contracts are also based on British versions: the Institution of Civil Engineers was the basis for FIDIC. And many companies in other parts of the construction chain are British too.”
Four that got away
Over the past 20 years, overseas growth has turned many European contractors into global mega-players while from the UK only Balfour Beatty has breached the £10bn turnover mark. It’s one of only four British-owned contractors operating internationally, the others being Carillion, Laing O’Rourke and Kier, which draws 30% of its turnover from overseas work and wants to increase that.
These companies work on some of the world’s largest and most prestigious infrastructure and building projects anywhere, but there are barely any other UK names on international tender lists.
Wates has taken a few tentative steps outside the UK, recently winning a contract to build two schools in Abu Dhabi, for example. Others remain resolutely focused on home. “Those four are really the only ones,” says Graham Robinson, global business consultant for Pinsent Masons. “Others have begun working outside the UK since the recession, undertaking pilot projects. It’s a good approach, but it’s cautious. Some of these markets are growing quite strongly, and we’re only just seeing some of these contractors move out of the UK.”
Of course, it’s not straightforward to set up a contracting operation overseas, where every commercial and legal aspect of business will be different from the UK norm. “There’s a big difference,” says David Lawther, chief executive of fit-out contractor ISG, which has established itself in office and retail work in Europe, the Middle East and Asia over the past eight years, building up a network of international offices.
“Project managers can simply fly people in to manage the project. Contractors need a supply chain, and that tends not to travel. We have to understand the local subcontracting market to get the right quality of product and the required health and safety standards. It takes time to invest and understand the nuances of the local market.”
Another issue is that contractors used to the UK culture of partnering, frameworks and pain/gain mechanisms are also typically more exposed on overseas projects, where there is often an expectation that the contractor will have deep enough pockets to co-finance the project one way or another. “There tends to be more risk transfer than there is in the UK,” says Vincent Clancy, chief executive at global project management firm Turner & Townsend. “Contractors here are used to a more collaborative approach and may find the levels of risk they’re asked to take on uncomfortable. There’s also more requirement for bonds and guarantees, which adds another layer of complexity.”
Listed companies, meanwhile, face negative pressure from investors, says Graham Hand. “If contractors are looking at working internationally, city analysts will talk them down. It’s been going on for years, and it has had a cumulative and important effect. What analysts really like a contractor to do is build houses, which are nice and safe, or prestige projects like Terminal 5 or the Olympics where you know you’re going to be paid.”
Contractors must also get to grips with local legislation, employment regulations and forms of contract, while corruption is a daily part of doing business in many markets. Under the UK Bribery Act 2010, firms face unlimited fines, not to mention reputational damage if they are caught out. Consultants can choose clients with care to avoid uncomfortable situations; but for contractors trying to get things done on the ground, it’s much harder.
“One of the risks of operating overseas is the lack of visibility,” says Phil Westerman, assurance partner and head of construction at accountant Grant Thornton. “If you’re not 100% confident in your information management systems, going further into foreign markets adds to the risk. You need to understand the local regulations, and people get caught out because they’re dealing with so many things. It’s so easy to fall foul of the rules without knowing it. You can’t just pick up your UK model and drop it into the local country.”
All in the mind
But the fact is that UK contractors used to be far more confident about operating overseas, so when and why did everything change? The EIC’s Kehlenbach suspects the UK mindset may have changed with the start of the PFI programme in the early nineties, and the ensuing construction boom. “When you have a good home market, there’s less desire to go internationally. Why would you leave a market that’s so good? Firms made a business decision that they didn’t need the international arena.”
He also traces the interest of European contractors in the UK’s own relatively open and transparent market back to this point. Many of those firms now missing from the EIC’s membership list have of course been absorbed by acquisitive European contractors — Taylor Woodrow was bought by French giant Vinci in 2008, for example, while Edmund Nuttall and HBG are now part of Dutch contractor BAM. And the trend continues — more recently, Leadbitter and Thomas Vale have been taken over by Bouygues.
The rash of UK takeovers by European contractors is another clue to why they succeed abroad while British firms stay home: they simply have deeper pockets. “Many of the international contractors who have ventured overseas tend to have bigger balance sheets than most in the UK and perhaps can therefore accommodate more risk,” says Jonathan Hook, global engineering and construction leader at PwC. “They have also often expanded through PPP/PFI by taking an equity position in the project, as well as taking on the construction. [Spanish contractor] ACS or [Australian contractor] Leighton are substantially bigger than any of the groups we have in the UK, and that means they can take substantially bigger risks.”
Another factor in the UK retreat was the growing competition from cheaper Asian contractors. In 2000, Kier pulled out of Africa, where it had worked for 50 years. “At that time, we were seeing a lot more Korean or Chinese contractors with far lower cost bases,” says Dave Parr, development director within Kier’s infrastructure and overseas division. “It’s expensive to use expats, and we found that we couldn’t match them, so we retreated into markets where we had a more secure footing.”
Although the firm is still very active in the Caribbean, Middle East and Far East, as a company it is far less international than it was in the 1970s, 80s and 90s. Parr says only up to 30% of the division’s business comes from overseas projects now, but that it is working to redress the balance. “We are finding different ways of working with a lot more local labour and management staff, and starting to become more competitive again.”
So Kier is intent on stepping up its international work again, but will focus this time on the Middle East. Parr says that Kier’s corporate history will give it a head start. “We have a lot of people within Kier who have 30 years’ experience overseas. It’s very difficult to get that experience these days because there are not that many contractors who work in these environments.”
Costain too has a 140-year history spanning continents, but it refocused on the UK in the 1980s and, until recently, has stayed there. According to Tim Bowen, regional development director for the Middle East, it was originally driven back home by cost pressures. Now it is making tentative moves back to the Middle East and Australia, but only to sell the professional services aspects of a UK main contractor’s role.
“We are focusing on what our clients tell us they really want from us — professional skills, cost control, health and safety, lean contracting, performance management — but using that to augment the supply chain that they already have, with other international contractors doing the work very cost efficiently” says Bowen.
If Nick Baird is serious about helping that expansion, Bowen offers one suggestion. “Many other international contractors have significant government support at critical times in the bidding process and this can make it hard to compete. There are lots of senior government ministers flying in, from the US and many of our European partners too. We have seen significant support from UKTI both in the UK and overseas and we would like this to continue. It appears that the South Koreans have been receiving a lot of support from their government in order to support their economy — international contracting is almost the face of South Korea.”
But Pinsent Masons’ Graham Robinson believes there is little the government can do while UK contractors maintain such a stay-at-home mentality. “As an industry, we are very conservative about what we do, and very slow to adopt new thinking and practices. It might be hard, but if you believe a market is going to grow, you take on that risk and you can do very well. If you’re an international global contractor, you’re prepared to take on these risks as part of your growth plan. If you’re domestic player, you’re not. It’s as simple as that.”
The big international players
Austria’s leading construction company employs around 10,300 staff and in 2011 achieved an impressive revenue of €13.7bn output volume, just 14 % of which came from the domestic market. Around 50% of the total output covered construction and civil engineering projects, 39% transport infrastructure and 9% tunnelling and services sectors. Poland is a major market.
With revenue up 3% to €13.8bn in the year ended December 2011, and employing a workforce of around 70,000, France’s third largest construction firm last year won an order worth €2.2 bn to design, build and maintain the future Brittany-Loire valley high-speed rail line that will connect the cities of Le Mans and Rennes.
Bilfinger Berger, Germany
A civil engineering firm with a focus on tunneling, bridge and road construction, hydraulic engineering, prestressing technology and foundation engineering, Bilfinger Berger employed 59,210 people at the end of 2011 and achieved an output volume of €8.5bn, 81% of that in Europe. Germany remains by far the group’s most important market, accounting for 40% of total output.
As domestic real estate continues to falter, FCC is expanding abroad. More than half the firm’s revenues came from non-domestic markets in Q1 2012, with its largest stake in Austria, through subsidiary Alpine, accounting for 41.4% of international sales. Recent projects include the London 2012 Media Centre and St Gotthard Base Tunnel in central Switzerland.
China State Construction Engineering Corp; China Communications Construction Group, China
The world’s largest contractor, the China State Construction Engineering Corp generated sales of US$72.6bn in 2011 and with the encouragement of the Chinese government has been taking increasingly bold steps abroad, last year hitting a new high when it built Baha Mar Resorts, a $3.4bn casino and resort in the Bahamas. It recently won a US$2.2 bn deal in Abu Dhabi.
Mainly involved in design and construction of transportation infrastructure, dredging and heavy machinery manufacture, China Communications Construction Group had 112,719 employees at the end of 2009. It is China’s largest port construction and design company and its leading road and bridge builder, notably completing the Sutong Yangtze River and Hangzhou Bay Bridges.
Daiwa House, Japan
Japan’s largest homebuilder, specialising in prefabricated houses, has experienced record sales following the earthquake in March last year, achieving net sales of US$21.7bn in 2011, ranking 12th in the world. With 3,592 employees, the firm is also involved in building commercial facilities and shopping centres, medical and nursing care facilities, office buildings and showrooms.
The largest construction and engineering company in the US has had a hand in many major projects, including the Hoover Dam, Channel Tunnel, the Three Mile Island clean up and Hong Kong International Airport. With some 53,000 employees in 2011 it had revenues of $32.9bn. Projects cover energy, transportation, communications, mining, oil and gas, and government services.