The Top 225 International Contractors | The overall global construction market continues to be soft as investment capital is hard to come by, but there are bright spots both geographically and in market sectors
Engineering News-Record, 30.08.2010
The responses to ENR’s Top 225 International Contractors survey tell an interesting tale. As a group, the ENR Top 225 generated $383.78 billion in revenue from projects outside their home countries in 2009, up 0.4% from $382.44 billion in 2008 (please note, this is a corrected figure from last year’s published results). This increase comes despite the financial turmoil experienced in many markets.
But a closer look at the figures shows that, for the most part, market downturn was regional in nature. Much of the construction recession was tied to the turmoil in the financial sector centered in the U.S. and Europe, which tended to stifle project financing across the board.
This slump is reflected in the numbers from the ENR Top 225. The U.S. market was hit the most severely of all regions, with international contracting revenue dropping 16.5% in 2009 to $34.88 billion, down from $41.60 billion in 2008. Europe also showed a major downturn, falling 11.7% to $100.81 billion in 2009 from $114.11 billion in 2008.
The Canadian market was essentially flat, in part because of fluctuations in oil prices in early 2009. Although Canada seems to have survived the financial meltdown better than many countries, the sudden drop in oil prices last year stalled many oil-sands-related projects, resulting in Top 225 revenue dropping 0.1% in 2009 to $13.38 billion from $13.40 billion.
The Middle East showed a similar lack of movement. Much of the developer-driven market in places like Dubai disappeared overnight, and many petroleum-related projects were put on hold while oil prices stabilized. But many governments in the Middle East continued to invest in infrastructure and industry to diversify their economies. Top 225 revenue from projects in the region rose 0.1% to $77.56 billion in 2009 from $77.46 billion in 2008.
Other regions that were more focused on infrastructure and development showed significant growth. The biggest increases in international contracting revenue came in Africa. Thanks to development and natural resources, international revenue in central and southern Africa for the Top 225 grew 31.7% to $27.52 billion in 2009 from $21.04 billion in 2008. North Africa grew 30.8% among the Top 225 to $29.29 billion from $21.04 billion in 2008.
International contracting revenue from the Top 225 in Latin America rose 14.1% in 2009 to $24.82 billion from 421.76 billion in 2008. International revenue rose 10.3% in the Caribbean to $2.29 billion.
The Asian market also showed strong growth. The Top 225 had $73.18 billion in international revenue in 2009, up 6.75% from $68.56 billion in 2008.
Among market sectors, the lack of project financing was readily apparent from the Top 225 survey responses. International revenue from general building projects dropped 8.5% to $85.99 billion in 2009 from $93.93 billion in 2008.
However, not all financing has dried up. “The slowdown was felt in some of our markets, such as Russia and Ukraine, in particular in commercial projects where clients are using bank financing,” says Erman Ilicak, chairman of Turkey’s Renaissance Construction. However, he says markets such as Libya and Turkmenistan have strong fundamentals. For example, Renaissance is working on Bab Trablous, the largest commercial development project in Tripoli, Libya, says Ilicak.
The global recession and lack of consumer demand resulted in international revenue in the manufacturing sector falling from $6.92 billion in 2008 to $3.81 billion in 2009. On the industrial-process side, international revenue fell 10.4% to $20.60 billion in 2009 from $23.00 billion in 2008. It was a flat market for petroleum in 2009, with revenue from such projects rising only 0.6% for the Top 225 to $91.42 billion from $90.84 billion in 2008.
‘Infrastructuring’
Infrastructure projects gave a boost to international contractors. The Top 225 showed significant increases in 2009 in transportation work (up 10.6% to $112.34 billion in 2009), water projects (up 17.5% to $11.22 billion), and sewer and wastewater work (up 11.6% to $6.29 billion). And revenue from power projects rose 33.6% in 2009 to $35.69 billion for the Top 225.
This active market for infrastructure has helped many international contractors stay strong. “A lot of government money is going into infrastructure all over the world,” says Herbert Lütkestratkötter CEO of Germany’s Hochtief. “I do not share the fear that … the market will dry up.”
The continuing tight economic conditions in many countries have many international contractors worried that opportunities for international firms will become increasingly difficult to get. “Political importance of supporting and preferring local companies, especially at state-financed projects during tough times,” may become a problem, says Ilicak.
Increasing national debt loads among major countries, particularly in Europe and the U.S., may stifle some public infrastructure spending, which is another concern. Public-sector cuts will be widespread, “but there will be a shift in government spending into public-private-partnership [P3] spending,” says Lütkestratkötter. He is bullish about growth prospects of private-sector construction investment in Asia, fuelled by an emerging middle class. He also predicts increasing opportunities in the concession/P3 markets “in a few years.”
P3 financing conditions are improving, but they are still “nothing like they were three years ago,” says Michel Cote, deputy CEO of France’s Bouygues Construction SA. The lack of long-term debt continues to hurt, he says.
Bouygues has started design of the Miami Tunnel project, procured under a P3. “We are not … considering new P3s in the States,” says Cote. “We have found it was easier for us to bid in Canada.” Canadian P3s are structured like those in U.K., which are familiar to the French.
P3 prospects in the U.K., one of the biggest markets, “will continue, but we expect to see cuts,” says Johan Karlström, CEO of Sweden’s Skanska AB. But the firm recently has closed major deals in Europe and plans to seal a $300 million highway P3 in northern Chile this year. “We see several projects in Latin America,” he says.
Germany was “a latecomer” to P3 procurement, but “there is a constant deal flow,” says Lütkestratkötter. The U.S. is behind even Germany, but remains potentially attractive to Hochtief. The firm has a North America team tracking P3s, but its main focus is Canada.
Hochtief has interests in two P3s to upgrade existing toll highways in Greece, where construction has been slowed by the economic crisis. But the government has met its financial commitments to the deals, says Lütkestratkötter.
Asian Intrigue
Asia may be the biggest regional construction market in the world, but many international contractors are finding it tough. “The Asian market is booming again, specifically Hong Kong and even Singapore and South Korea,” says Cote. Bouygues recently won contracts for two tunnels and a ship terminal in Hong Kong.
With “huge infrastructure plans,” Hong Kong will be a “very strong market,” adds Ian Tyler, chief executive officer of the U.K.-based Balfour Beatty Group. Lütkestratkötter agrees, saying, “Hong Kong has the most robust stimulus package in the world, compared to the [territory’s] size.” But mainland China is elusive. “The hurdles … are very high,” he adds. Cotes goes further, saying, “China is totally closed.”
Evidence of such a closed market can be seen from the huge domestic numbers being reported by major Chinese contractors. In 2008, China launched a two-year, $586-billion infrastructure stimulus plan to maintain its economic growth.
However, most of this spending is staying with giant domestic contractors. China Railway Group Ltd., China Railway Construction Corp. Ltd., China State Construction Engineering Corp., China Communications Construction Group and China Metallurgical Group Corp. report a combined total of $326 billion in new contract awards in 2009. Of that, 85% was from domestic projects.
But the other Asian giant, India, is proving more attractive. Hochtief has “scouting teams,” lured by India’s huge highways upgrade program, much of it procured through P3s. But Renaissance Construction has decided the Indian market is not a good match for the firm at this time, and it will continue to focus on Russia, the former Soviet republics (CIS), and Arabic-speaking countries, says Ilicak.
Oil-rich nations, including those in central Asia, are “still very attractive,” says Cote. Bouygues’s targets include Abu Dhabi. There is “ample work” in Qatar and Saudi Arabia as well, adds Lütkestratkötter. Business in Dubai “is not going to improve any time soon, [but] it’s not completely dead,” says Tyler.
After a lull in the oil-and-gas market, investment has spiked. The Kuwaiti-based Organization of Arab Petroleum Exporting Countries now estimates member countries are expected to invest $70 billion in energy projects by 2012 to boost crude-oil production capacity, according to Evgeny Zagorodny, vice chairman of Russia’s PJSC Stroytransgaz. “The bulk of investments would be based in UAE, Saudi Arabia, Kuwait, Qatar, Algeria and Egypt,” he says.
In 2009, Korean contractors made major inroads in the Middle East oil-and-gas plant market, with total award volume reaching more than $30 billion, says Dae-Yung Ahn, executive vice president of corporate strategy and planning for Samsung Engineering. Samsung “ranked on top” with new orders in 2009 amounting to $8 billion, he says.
Samsung Engineering now is planning to diversify. “Although the Middle East was our primary market, we entered the North African market last year and we aim to diversify into other regions such as Libya, Egypt, Central America and the CIS,” says Ahn. The firm also plans to move into the industrial and infrastructure sectors, including powerplants, steel mills, desalination plants and water treatment facilities, he says.
Not all of the investment in the Middle East is oil-based. The Middle East, the Caspian region and Africa present the biggest opportunities, says Suhayl Shami, manager for Greece’s Consolidated Contractors Group. “These regions have a great deal of catching up to do and are building their physical and economic infrastructure,” he says.
The boom times in the Middle East and North Africa have drawn contractors from around the world. Shami is concerned about the recent trend of government-supported Far East contractors entering the Middle Eastern and Africa markets. “We think that direct or indirect [political or financial] government support undermines the fairness of the bidding process and limits fair competition,” he says.
Worries in Europe
In the EU, Poland is “maybe the only country … which had a positive GDP,” says Karlström. “It’s very competitive.” Nordic countries, especially Sweden, are now Skanska’s “strongest” market, he says. Otherwise, the region has “significantly slowed down,” adds Lütkestratkötter.
The European trend for public spending cuts “is really a problem,” says Cote. Commercial construction in Bouygues’s hometown, Paris, is busy, while work in the provinces “is back to 2006 levels.” But signs of industrial growth in Germany raises Lütkestratkötter’s optimism.
Spending cuts in the U.K. will affect parts of Balfour Beatty, but new growth sectors, such as powerplants, offer compensatory opportunities, believes Tyler. The U.S. is “a much more stable market than we see elsewhere,” he adds. “But it’s not going to be … easy.”
In the U.S. “forecasters … say the market should stabilize this year,” says Lütkestratkötter. But even in the current climate, he is content with the performance of Hochtief’s subsidiaries, Turner Construction Co. and Flatiron Construction.
“We see a lot of projects coming to the [civil-sector] market,” says Karlström. “But it’s very competitive.” He believes the introduction of the new health-care plan will create projects. Skanska plans to expand to the west coast organically and through acquisitions, says Karlström.
In Latin America, Skanska is “more geared toward the energy sector,” says Karlström. Interest in renewable energy is growing while infrastructure and mining-related work is picking up, he adds. Balfour Beatty has done “bits and pieces” of work around Latin America. “We [now] are seeing some opportunities, largely through our rail business,” says Tyler.
Competition in the international market has some contractors becoming increasingly aggressive in their bidding. “This may definitely lower the prices, reduce the quality and may leave incomplete projects, failed contractors and litigation,” says Ilicak of Renaissance.
The market will rebound, but many international contractors are wary of inflation when this happens. “The main factors that concern us about the international construction market in the near future are inflation and currency fluctuations,” says Shami of CCC. He says the Chinese yuan is getting stronger against other currencies, and this could cause a worldwide increase in materials prices.
