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KPMG survey finds 'power lies with buyers in UK'

Revenues generated by joint ventures are expected to almost triple in the next five years, KPMG forecasts this week.

The prediction comes as a survey of top contractors by the accountancy giant revealed that nine out of 10 firms believe negotiating power on UK contracts lies in the hands of buyers, compared with just half abroad.

Only half of firms have revised or updated their IT system in the last two years compared with 81 per cent globally.

The findings are from a KPMG survey of 161 senior executives from the world’s leading engineers and construction firms in 25 countries, with company revenues from $250m to more than $5bn (£159m to £3.17bn).

The research, shared exclusively with Construction News, was released yesterday at the firm’s 2012 Construction Industry’s Opportunities and Outlook event.

A buyer’s market

UK head of infrastructure, building and construction Richard Threlfall said the industry had been in a “state of stagnation” for the past three years. Margins have bottomed out, despite some continued suicide bidding, and firms have battened down the hatches and focused on core business.

Almost half of firms said margins were down and 92 per cent of respondents said the buyer now has more negotiating leverage, while only half said this was the case globally.

“It’s not just that the margins are being squeezed, but the levels of liability are being pushed up on the contracts; the payment terms are getting longer and longer.

“In a number of respects, the UK market absolutely is a buyer’s market in construction.”

London and the South-east, energy and rail, remain the growth areas. But savings can be made by removing layers of supervision in the supply chain, cutting out duplication of employees and work and updating technology.

“Building information modelling is just one piece of it – it’s more fundamental; how finance systems and procurements systems tally with each other; what kit they have got – and most of the construction companies don’t know who they’ve got at what site from one day to another.”

Joint ventures

Joint ventures also suffer if they do not share information effectively. The share of work being done by joint ventures globally is set to rise from a third to 80 per cent in the next five years, said KMPG UK & Europe head of JVs Marc van Grondelle.

“We currently have about 30 per cent of revenue in JVs – within five years that’ll be 70 or 80 per cent.”

Energy, power and other infrastructure and urban regeneration are some of the most active sectors. KMPG has also been advising the UK public sector on the arrangements.

But Dr von Grondelle said more than 80 per cent of global joint ventures “under-deliver or fail spectacularly”.

“Projects struggle to strike the right joint venture which works for both individuals. They sometimes make compromises that they wish they hadn’t further down the road. Several struggle to put the kind of governance in place that can detect the issues at the time they can be repaired.” 

Dr von Grondelle said more suppliers were asking to enter joint ventures “to get a more prominent position at the table”, but that risk sharing – including financial and reputational – and governance, along with stress testing, remain major challenges.

The partnerships can be fruitful but difficult in countries such as India or China.

Access to capital

Partner in global infrastructure with expertise in corporate finance Darryl Murphy said many banks do not understand construction risk.

“The level of sophistication in discussion of construction risk is very low outside the industry.

“The government can play a part in that, but I think the industry can play a part in that.”

Partner in corporate finance Melanie Richards said access to capital remains tough as banks face pressure to lend on one hand, but regulatory changes focused on strengthening balance sheets and restricting long-term lending on the other.

“That’s made the raising of capital difficult and challenging, so relationships are key with the banks,” she said.

“The good news is that there is definitely capital to be put to work, but the bad news is that it is harder to obtain and people are being more selective.”

Having an articulate and clear strategy is central, she said, but Ms Richards predicts Europe following the US trend, where only 20 per cent of capital comes from the banks and the rest through the capital markets.

“What it means is that clients are having to be more imaginative about where they source their capital from.

“Insurance companies are increasingly going to be the more natural providers of long-term capital, as they should be, because they have balance sheets looking for long-term assets.”

Infrastructure

But Mr Murphy said there were no quick fixes for UK infrastructure.

He said the National Infrastructure Plan 2011 was a big step in the right direction but
that the priority schemes are programmes with numerous projects within them, some of which are “in procurement and some are a dream”.

Mr Murphy stressed that the question is one of funding, not financing, which will ultimately have to be paid for by the government and the taxpayer.

Describing it as the “socialisation of costs”, he added: “I think the consumer has to start recognising the true cost of infrastructure.”

Mr Murphy said there needs to be a granular plan on a sector-by-sector basis, setting out what the country is trying to achieve and how to go about it. He said the same applies to the private finance initiative, where people are “still looking in the rear view mirror”.

He added: “The relevance of financing to HS2 or nuclear is zero. They are not going to be funded during construction other than on a big balance sheet of a utility or government.”

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