This cautious optimism is not shared in the South African Market as many of the large infrastructure projects are yet to gain momentum and, with long lead times, it is unlikely that 2011 will show an improvement says Gavin Maile, KPMG Africa Construction Leader.
Optimism and repositioning
Findings from the KPMG 2010 Global Construction Survey, Adapting to an Uncertain Environment, indicates that the lingering economic downturn and associated constraints have generated a growing movement among global E&C companies to create stronger, more resilient business models that can weather change and manage risk. 77% of respondents said they have in place sophisticated systems to effectively manage risk.
Another outcome of the opportunity to redefine their businesses is that many of the global players are creating new integrated services offerings or expanding overseas to increase market opportunities. South African construction companies are looking to the rest of Africa for growth and opportunities.
“The willingness of contractors to move into new markets, and possibly to evolve their value proposition, could be the difference between thriving and merely surviving,” said Geno Armstrong, international sector lead for KPMG’s Engineering and Construction practice. “With margins unlikely to rise for traditional business, such a repositioning could be vital.”
Close to half of respondents have forecast rising backlogs (secured orders) in 2011 that would come from pent-up demand; expansion into new services, such as power; or moving into additional geographies, such as the Middle East, Asia, Australia, Africa and India. Asia Pacific demonstrated the most promising outlook in backlogs in 2011 with 21% of respondents confident of a significant increase.
Other findings include indications that few companies expect to lay off workers in 2011, while 31% said they will likely hire more direct labour in that period. The opposite is expected to occur in South Africa after the slow pickup with new projects after the Soccer World Cup, both from a public and private sector point of view, says Gavin Maile. Employment in the construction sector has already fallen by over 10% in 2010.
Margins have taken a cut over the last year, as most respondents said they had to reduce prices. However, the impact has been lessened due to cost-cutting measures. Looking ahead, more than 30% of respondents said they are bidding on new projects with lower margins but that factor is offset by the sentiment that backlogs are predicted to rise dramatically.
Meanwhile, government stimulus initiatives around the world have had varying levels of success, with more than 35% of respondents from Asia Pacific stating that stimulus efforts have had a significant impact. In contrast, the majority of respondents from the Americas and Europe, the Middle East and Africa said that stimulus packages did not improve market opportunities.
Improved risk and compliance measures
With risk management an even higher priority in the new environment, most respondents said they continue to improve efforts with new programmes to train employees, analyse their bidding and planning processes, and develop a more formal risk approach.
The survey also showed that more than a third of companies based in North America are further ahead than other regions with risk management plans due to increased regulatory pressures. Nearly 50% of the companies polled in the survey said that their policies and procedures on accountability need to be more effective.
Regulatory compliance, though, may be delivering some unforeseen benefits.
“The more enlightened operators are realising that a strong set of values can enhance their reputation and help win new business,” Armstrong said. “Shareholder value is increasingly linked to intangible assets, such as a company’s safety program, and customers are looking closely at whether contractors are responsible corporate citizens.”
With signs of economic improvement on the horizon, E&C companies are looking at ways of funding their geographic expansion and new offerings. Credit is still tight with 47% saying that financing is still very difficult to obtain. Many respondents – mostly those outside the US – consider public-private partnerships (PPPs) to be a good bet for the industry if there is government backing.
“The global E&C industry’s optimism and notable progress on making major improvements to become leaner and more focused provides a strong foundation for the years to come, “ said Maile. “The future is far from certain but continuing to invest in risk management, expanding into new areas and building a skilled staff are critical steps that can help weather any change.”
About the survey
The KPMG 2010 Global Construction Survey, Adapting to an Uncertain Environment, polled 140 senior leaders of major global engineering and construction companies in 25 countries to gauge their views on their business outlook for the sector. 46% of the respondents were based in the Europe, the Middle East and Africa (EMA), 30% from Asia Pacific (AsPac), and 24% from the Americas.
Below are highlights of findings from each of the three regions.
- 21% believe that their organisations backlog will increase significantly, the most bullish of all regions
- A third of companies said that the stimulus package had a significant impact
- Higher average margins compared to those in other regions
- A third of companies said stimulus packages had a significant impact
- Only one in seven construction companies have made job cuts in the past year
- 7% believe that their organisations backlog will increase significantly in the coming year
- 69% expect to experience no impact from the government stimulus in the next 12 to 24 months
- 24% consider their risk management practices to be highly effective
- 35% have taken on more government compliance staff
- 9% believe their backlog will increase significantly in the coming year
- 29% reduced their pricing to breakeven levels or below in the last 12 months
- 71% reported that the government stimulus has had no impact on their bid opportunities over the last 12 months
- 24% planned to cut 2010 investments
Download the survey now.