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Fostering investment is critical

Which areas of construction are going to grow and how will that work be paid for? These are two of the questions being tackled by speakers at this week’s Forecasting for Construction conference.

There is widespread confidence that energy and infrastructure such as rail are areas where there will be work to be had.

Bam Nuttall chief executive Stephen Fox points to rail, water and power generation as areas of opportunity, but adds that the construction market as a whole “has shrunk and the market is not going to grow; it will remain broadly flat”.

He also urges caution over some of the government’s vaguer spending announcements. “A lot of work that is out there is not really out there because it is not committed; it is hope,” he says.

“The £200 billion in the national infrastructure plan is just aspiration and is not firmed up. What affects us is the perception that the construction industry is not quite as tough as it [actually] is at the moment.

“It is [tough]; lots of people are talking about things that are not really happening.”

The other major question is how to get investment into projects. A widely held view is that there are fewer banks interested in lending on construction schemes.

Barclays vice-president of infrastructure and structured project finance Dipak Haria says before the financial crisis there would have been 40 to 50 lenders looking at deals, whereas now the figure is no more than 20.

“So there is now less than half the liquidity looking at the market,” he adds.

Wates group investment director Stephen Beechey agrees there are fewer lenders in the market but says financing is slowing coming through again, although it is still constrained. He thinks lending conditions might start to relax from 2014.

Getting institutional investors to back construction projects, particularly infrastructure, has long been touted as an alternative to bank loans but investors have been deterred by construction risk.

Mr Haria says Barclays is looking at whether it could provide funding for the construction phase with an institutional investor giving longer-term backing.

“It allows the institutions to look at the project as a better-rated project and see where they might put longer-term capital,” he says.

Results guaranteed

Another way to attract institutional investors by reducing risk is UK Guarantees, the £40bn scheme where the government stands behind private investment in major infrastructure projects.

KPMG UK head of infrastructure, building and construction Richard Threlfall says: “Everything else about infrastructure is really attractive for pension fund managers; the only thing in the way has been construction risk.

“UK Guarantees is a neat way to take away the one thing they find difficult.” But others point out that while the guarantees are a positive development, smaller construction projects need help too.

One of the most eagerly awaited government announcements on construction financing will be on the reform of the private finance initiative.

But despite it being roughly a year in the making, early indications suggest the new model may not be substantially different from the old one.

Both Mr Beechey and Mr Haria think that the new version will include handing the risk of legal changes to the public sector, which should cut the cost of paying the private sector a premium to carry a risk that is unlikely to materialise.

They also think the new version will no longer cover ‘soft facilities management’ such as cleaning, catering and gardening.

On the plus side, a scheme which is similar to PFI in all but name will be well understood. But if it does turn out that little has changed, then inevitably some will ask if there was any point to the overhaul.

Top tips: Stephen Fox, Bam Nuttall

  • Medium-sized enterprises are most vulnerable in current climate.
  • Focus on where to cut costs from the business. Medium and small firms have to look at what causes load on their cashflow. Smaller companies need money coming in to service their cashflow and debt and have to make sure they have enough volume going through the business to stay inside their overdraft.
  • Look at whether you have assets that you should not be carrying.
  • Tender for jobs you know you can win. Make sure you get a good return from your bidding costs; get a good strike rate.
  • Look at the financial stability of the firms you work for. Look at payment terms and guarantees and look at what you can do with the management of central costs.

 

Top tips: Richard Threlfall, KPMG

  • Do everything you can to manage your cash position.
  • Drive cost out of the business. We never fail to find another 10 per cent of cost savings when we are brought into businesses in this sector. They are all very diverse businesses and when you look across them you see how much duplication there is. Many have lots of people in parts of construction that are not going anywhere in the next few years.
  • Mostly you will have pockets of expertise in areas that are growth areas so you need to invest in those areas quite quickly.
  • Businesses that consumers recognise as good and that have a clear specialism are hoovering up what work is out there.

 

 

 

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