This year’s survey results confirm that engineering and construction firms are still heavily dependent upon national governments’ infrastructure plans for future growth, with two-thirds of respondents citing this as the single most important market driver. Such reliance means any further public belt tightening could potentially cut off a vital source of new projects; indeed, 71 percent believe that budget deficits are the biggest threat to the sector.
Economic growth, urbanization and population increases are considered to be the next most influential factors, fuelled by the BRICs (Brazil, Russia, India and China) and other growing economies. As more people move to cities, water, electricity, sewage, telecommunications and roads and bridges all need to be built or upgraded.
Less than one in three feel that new energy resources will be a prime driver, which is surprising, given that the rising demand for power is causing a boom in unconventional sources such as shale gas and oil, as well as renewables.
Interestingly, public private partnerships (PPPs) were cited as important by just 28 percent of the survey participants, which suggests a degree of uncertainty about the future of such funding sources as they have proved controversial in some countries. As national governments struggle to find funding, they may have little alternative than to turn to the private sector, a point emphasized by one executive from the US: “Relying on governments for our growth is risky, although PPPs can help.”
A further comment from a senior industry executive of a Turkish engineering and construction company reinforced the risk of becoming over-reliant on public sector programs: “One of our projects signed in 2003 was recently cancelled, due to government funding problems.”
Most of those taking part in the survey agree that the full effects of growth will not be felt for at least 2 to 5 years. Such caution is perhaps understandable in a sector that over the past decade has ridden the waves of success before experiencing a serious wipe out. It seems that leaders of engineering and construction groups are seeking further evidence of a sustained commitment from governments and the private investment community, before committing to scaling up resources.
Respondents to this year’s global survey appear to be open to new sources of business. Forty-seven percent say that they plan to move into new geographies, and 44 percent are prepared to enter new sectors of the industry.
The most popular region for expansion is Africa, followed by the US and Canada, with the Middle East third. Engineering and construction companies from the Americas are the big exception, with 64 percent placing the US and Canada as their first choice. These findings suggest that Central and South American companies may be attracted by the geographical proximity and economic and regulatory stability of North America. Twenty-seven percent of respondents from Asia Pacific are considering entering the Middle East, despite the turmoil in Egypt, Syria and Iraq. Very few senior industry executives plan to move into Western Europe, reflecting the challenging business climate in this region.
The US and Canada are the top choices for medium and larger firms taking part in the survey, which once again indicates that markets such as Africa are seen as carrying higher risk. However, only one in 10 smaller companies expect to enter the US and Canada; these organizations may feel that the level of competition is too great in this part of the world, and are more comfortable setting their sights on Africa. Overall, the survey shows that the bigger the company, the more likely they are to have ambitious overseas growth plans.
Power is undisputedly the dominant new sector, which is consistent with the increase in economic activity and the global quest for greater energy security, fuelled by cheap prices for gas. Power stations are being built around the world for coal, nuclear, gas and renewables. Mining is another high priority, with growing demand for copper, iron ore and specialty metals. In second place is water, to support urbanization and water-intensive industries such as mining and other forms of manufacturing.
Twenty-four percent of respondents state that their company sees good prospects in the rail sector, which is enjoying a boom thanks to initiatives such as the Delhi and Rio de Janeiro metros, California’s high-speed development, New York’s ambitious plans, and the UK’s London Cross-Rail and High-Speed 2 programs, as well as various national projects to transport coal, liquid natural gas and other raw materials essential for energy. Businesses from Asia Pacific place high hopes on roads and bridges, reflecting their infrastructure needs.
As they move into new sectors and geographies, leaders should be aware of the necessary skills and knowledge associated with these industries and regions. One respondent from a Greek contractor says his company suffered from such inexperience: “The project that underperformed was in the field of offshore engineering, where we had limited previous experience, technical skills and expertise within the group.” Another executive from a Canadian firm affirmed this concern: “We are experiencing growing pains due to our recent rapid revenue growth. We have key project players operating outside of their comfort zones negatively impacting project execution.”
Across all regions and all company sizes, growth is expected to come primarily through organic routes, with less than 10 percent believing that mergers and acquisitions (M&A) will fuel such expansion. A number of respondents mentioned that cash shortages restricted their options to pursue M&A.
As the sector prepares for a period of expansion, leaders acknowledge that their organizations need to have the right support in place. Mega-project management is seen as a crucial component to deliver expensive, complex programs on time and on budget, minimizing waste and avoiding the expense caused by idle physical and human resources.
Of all the factors necessary to growth, however, efficient risk management ranks highest, with 81 percent naming this as the most important. A robust risk culture helps avoid some of the pitfalls that can destroy margins and damage reputations, yet, as the next section shows, the industry still has some way to go before it can have real confidence in its ability to manage risk.
KPMG’s ninth edition of the Global Construction Survey focuses on the challenges facing owners as they seek to climb the maturity curve.