Global infrastructure construction industry has been thrust firmly into the headlines. The award of contracts to build the first phase of HS2 (high speed railway 2) between London and Birmingham was announced this morning (17 July) by the UK transport secretary.
Infrastructure construction company and support services supplier Carillion is one of the three companies appointed by the UK government. As part of the CEK joint venture it will work with the UK's Kier Group and France's Eiffage Genie Civil.
The expected total value of this morning's contracts including both Stage 1 and Stage 2 (the full construction phase) is currently estimated to be worth £6.6 billion, said transport secretary the Right Honourable Chris Grayling MP in the official announcement.
Stage 2 will commence
Stage 2 will commence in 2019 and, along with Stage 1, is expected to support 16,000 jobs across the country. In addition, they are expected to generate 7,000 contract opportunities in the supply chain, of which around 60% are expected to go to SMEs.
Keith Cochrane, interim chief executive officer at Carillion, said: "We are delighted that our Joint Venture, CEK, has been selected to deliver two of the three Central contracts for HS2 Phase 1, reflecting the strength of our joint venture.
He took the opportunity to remind observers that Carillion is a leading global infrastructure construction vendor with top two positions in the UK rail and highways sectors, where it works in partnership with key customers, including Network Rail, Highways England and HS2.
“We expect the UK Government's objective of generating economic growth through investing in infrastructure to continue creating opportunities for us to grow our business in these core markets," he added.
The economic health of global infrastructure construction industry is dependent upon upon demand, as economics 101 will explain. But the industry, by its very nature, is unusually dependent upon government policy on underlying projects. Things are suddenly heating up.
Moody's 2017 outlook
In its 2017 construction global outlook paper, debt rating agency Moody's Investors Service writes of healthy prospects for infrastructure construction. It points to increasing traffic volumes, especially in emerging economies.
The trend towards urbanisation should lead to expansion of roads and railways, it says. Electricity Transmission and Distribution (T&D) networks should see modest growth in developed countries to improve security of supply.
In emerging countries, it expects high and growing demand from new projects. Government budget constraints, however, may limit infrastructure spending. Low prices for power, oil, gas and coal will continue to weigh on capital expenditure.
This will affect conventional power generation, upstream facilities for oil and gas, as well as mining. Renewable energies, especially wind, will continue to benefit from strong political support and efficiency improvements. Affordability is the main constraint, says Moody's.
A word from Headwaters and Catalyst
Phil Seefried, co-founder and chief executive officer of Headwaters MB, and Mark Wilson, a UK-based Partner at Catalyst Corporate Finance, issued a comprehensive note on the topic late in June.
Their observations include the suggestion that global infrastructure construction will be among the key industries to watch as the political landscape in the USA begins to settle down into the reality of the Trump administration.
They see opportunities for US and UK investors business alike. These will arise as President Trump begins to make good on his campaign pledges to deliver major programmes of public works, despite his administration’s early teething problems.
Sectors in favour include global infrastructure construction industry
Investors remain convinced that president Trump’s administration will create exciting new opportunities. Infrastructure, where the president has promised huge programmes of public works, is a key focus.
It is not only US global infrastructure construction vendors that will benefit from these drivers. International businesses, including competitors from the UK, will find opportunities in each of these sectors too, as the ripple effect continues.
British and European businesses with interests in sectors such as Infrastructure are increasingly looking to the US as an important part of their growth strategies, reflecting perceived new opportunities in these areas.
Beyond the headlines
Catalyst's Wilson said: “Looking beyond the headlines, the stable economic backdrop continues to excite investors in the US, while US investors have the strength and confidence to pursue international opportunities.
“For UK businesses, opportunities in sectors such as infrastructure and natural resources look especially enticing in a Trump context, but there will be possibilities throughout the marketplace; UK businesses can also expect to continue to be targets for US investors.”
Global infrastructure construction industry lessons from the UK
A study released recently by Dr George Inderst, an independent adviser to pension funds, institutional investors, and international organisations also considers global infrastructure construction industry and what lessons the UK experience have for other countries.
In a nutshell, he notes, the UK has for some time been living on the combination of an ageing infrastructure, weak spending by the state (and taxpayers) and strong private sector involvement in infrastructure finance.
The country’s creaking infrastructure needs more investment when public budgets are already stretched. The question is, he suggests, whether private capital will be as easily available in future as in the past, especially from trusting institutional and foreign investors.
Major positive lessons from the UK experience include
- Importance of a stable political system and macro economy
- Solid institutional and legal environment, clear property rights
- Highly developed capital markets, with a strong and diverse investor base
- Open borders for overseas infrastructure developers, operators and investors
- Strong private sector involvement in infrastructure, both via privatisations and PPPs (public private partnerships)
- Proven regulatory system for utilities, telecoms, and other infrastructure sectors
- Long experience with PPPs, especially in social infrastructure with availability payments; PPPs in particular require time and a high degree of trust to succeed
- Financial centre with high private sector capacity and international expertise
I'm from the government; I'm here to help
For what it might be worth, a national technology roadmap that will support the growth and technical capabilities of the UK construction and infrastructure sector was launched by Lord Prior on 11 July at a meeting of the Construction Leadership Council (CLC).
The roadmap, produced by the Infrastructure Industry Innovation Platform and the Manufacturing Technology Centre (MTC), outlines the critical challenges which need to be addressed in order to meet the targets set in the Government’s Construction 2025 Strategy.
- 33% lower costs
- 50% faster delivery
- 50% lower emissions
- 50% increase in exports.
The roadmap articulates key technologies – from augmented and virtual reality to autonomous sites – that will enable the industry to address its challenges.
It has been aligned around the CLC’s three strategic themes: Digital Transformation, Manufacturing Construction, and Lifecycle Performance.
The news, though, that the government is here to help is enough to send a chill down the experienced spine. The heart of anyone old enough to recall the late Harold Wilson's white heat of technology speech in October 1963 will surely sink. Does one laugh or does one cry?
What affects the sector’s share prices?
The strength of demand for infrastructure construction services. The availability of sufficient funds to pay for those services. The quality of management in the deployment of cash and other resources to meet contractual requirements and make a profit.
Global infrastructure construction contractor's development of revenues. Moody’s states that a company with shrinking revenues will typically show increasing contingent liabilities to revenues, until existing projects are completed and related guarantees expire. An increase in the order backlog.