- The sector expects growth this year, yet economic uncertainty in most regions is still a major concern.
- Engineering and construction companies’ efficiency and risk management processes were put to the test.
- Perceived lack of government policies and leadership are seen as the biggest barriers to Public-Private Partnership investment in infrastructure.
- Doing business in emerging markets creates new risks.
As major urban areas strain to support rapidly growing populations adequately, the need for infrastructure is at an all-time high. This development is so pivotal that it is pressuring the engineering and construction industry to step up as never before to meet the challenge, and putting their efficiency and risk management processes to the test. This is among the key findings of KPMG’s 2012 Global Construction Survey: The Great Global Infrastructure Opportunity.
KPMG surveyed 161 engineering and construction companies around the world with revenues ranging from US$250 million to more than US$5 billion. Nine South African companies took part in the survey.
“With increased scale comes complexity as global industry players navigate a tough political, commercial, regulatory and governance environment which will test their risk management ability to the maximum extent,” said Geno Armstrong, KPMG’s International Sector Leader, Engineering and Construction.
Just over 40 percent of respondents globally anticipate that the energy sector offers the greatest opportunity for revenue in the next 12 months. Second behind energy were roads/bridges, tied with residential at 24 percent, followed by rail and mining. Gavin Maile, KPMG Africa Construction Leader said, “South African respondents were significantly higher with 78 percent, indicating that the energy sector provided the greatest possibility for revenue growth in the short term.”
While 49 percent of respondents expect their backlogs will grow from 5 percent to over 15 percent in the next year, 71 percent of respondents cite economic uncertainty as their biggest ongoing concern followed by a skills shortage (31 percent) and thirdly, government deficits (30 percent). 62 percent said that they expect margins on current bids to remain unchanged from their current backlog.
57 percent said their revenues in 2011 increased from 2010, with the Asia Pacific region seeing the greatest growth (72 percent) followed by Europe Middle East and Africa (EMEA) at 53 percent and then the Americas (41 percent).
Creating efficiencies to manage complexity and meet demand
To mitigate risk, manage project complexity and effectively meet the anticipated increase in demand, companies are seeking solutions to address inefficiencies in their procurement/supply chain. Nearly 60 percent of respondents say improvement in this area will improve profits and enhance cash flows. Almost 40 percent of respondents say the primary cause of inefficiencies in their supply chains was disparate processes and systems.
Cost cutting still remains a challenge for companies as well, with organisational culture seen to be the culprit for not implementing the cuts for 61 percent of respondents globally, and 78 percent in South Africa. A surprising 17 percent of respondents globally said that cost reduction was not a priority at all.
Survey respondents acknowledge that IT optimisation is critical to improving efficiencies, yet 50 percent say that overhauling IT systems takes too long and costs too much. Others (30 percent) say that there are not enough Enterprise Resource Planning (ERP) packages available that are tailored to the construction sector.
With projects anticipated to become more complex, maintaining margins and mitigating risk are major concerns for most respondents. Globally, 45 percent of respondents say that quantifying risks is the chief concern. In South Africa, 44 percent of respondents say that the mitigation of risks is the main focus and nearly 56 percent said they want to understand the link between strategy and risk.
“Our survey revealed that 54 percent of respondents said they failed to identify issues in the bidding stage that later caused margin erosion in significantly underperforming projects. Only 36 percent believe that their project review processes are very efficient,” Maile said. “This is despite considerable investment in risk management over the years.”
What respondents say may be the primary barriers to Public-Private Partnerships in infrastructure investment is a perceived lack of policies, leadership and investment by the public sector, as well as a lack of initiative in the private sector.
Less than half (47 percent) of respondents believe government policies will have a positive impact on investment, which is roughly equal across all three regions. Moreover, respondents showed concern about the public sector’s ability to drive infrastructure investment, with 80 percent of respondents globally saying that lack of leadership will hamper investment. “These results highlight that the lack of government commitment is not just a South African issue, but rather a global issue of balancing available resources and priorities,” Maile comments.
While respondents globally anticipate that energy (34 percent) followed by transportation (33 percent) will likely attract the most private sector investment for their companies, two-thirds see a lack of private sector initiative as another barrier to investment. 56 percent of the Americas respondents see transportation as having the biggest appeal for investment.
“Governments around the world need to create an environment that encourages private sector investment, addresses regulatory and legislative barriers and they need to show the kind of long-term will that transcends immediate political popularity,” said Maile.
All survey responses for KPMG’s 2012 Global Construction Survey: The Great Global Infrastructure Opportunity were gathered through face-to-face interviews in 2011 with 161 senior leaders – many of them Chief Executive Officers – from leading engineering and construction companies in 27 countries around the world.
Of the respondent, 52 percent were from EMEA, 31 percent from the Americas and 17 percent from the Asia-Pacific region.
Respondent companies’ turnover ranged from less than US$250 million to more than US$5 billion, with a mix of operations from global through regional to purely domestic.
The interviews were carried out by senior representatives from KPMG member firms specialising in the engineering and construction industry, with the questions reflecting current and ongoing concerns expressed by clients of KPMG member firms.
A copy of the survey is available on kpmg.co.za or www.kpmgafrica.com