The Top 225 INTERNATIONAL CONTRACTORS
Engineering News-Record, 31.08.2009
The worldwide construction industry has undergone a series of blows over the past year. The meltdown of the financial markets in the autumn of 2008 halted much of the financing needed to launch projects. This was followed by a collapse in oil and metals prices, causing producers in those sectors to rethink their capital plans. The ensuing recession has caused many international contractors to scramble.
Even while most markets are slumping, many international contractors are facing the market downturn with record backlogs to cushion them after several years of frenetic demand. The scale of the boom market in early 2008 can be seen in the revenue figures for ENR’s Top 225 International Contractors. The Top 225 as a group generated $390.01 billion in revenue in 2008 from projects outside their home countries, a 25.7% increase from $310.25 billion in 2007.
However, the recession has taken its toll on projects around the world. For example, in the past, “80% of our turnover was from the commercial real estate market in Russia, but after the credit crunch, most of the projects at this market were terminated or postponed,” says Erman Ilicak, president of Turkey’s Renaissance Construction. He says his firm is fortunate to have branched out into industrial work and moved into other geographic markets. Ilicak says Renaissance now has a $1.5-billion backlog in Libya and is moving into the Saudi market. The firm also is building a crane manufacturing plant in Russia for Germany’s Liebherr.
“The construction industry in the Middle East was negatively impacted by the financial crisis as well as the stopping or slowing down of many construction projects owned by the private sector,” says Samer M. Arafa, executive vice president of Al-Arrab Contracting Co., Saudi Arabia. “Dubai seems to have been more affected by the financial crisis due to the big exposure to private-sector development projects,” he adds.
In the petroleum sector, the recession also has had some impact. “I have seen decreasing investments in all [petroleum] sectors of around 25% to 30% compared with the forecasts made in 2007 to early 2008,” says Leonid V. Bokhanovsky, director of the development department for Russia’s PJSC Stroytransgaz. “Among the sectors, the highest impact of recession is in the upstream market.
”However, Bokhanovsky notes that there is a “good forecast for the mid- and long-term demands for hydrocarbons around the world.” He says Stroytransgaz is working on major gas pipelines in the United Arab Emirates, Algeria, Syria and India, as well as oil pipelines in Saudi Arabia and Kazakhstan.
But some firms see the recession’s impact on the energy market as a temporary blip. Some independent oil companies have reduced their capital expenditures in 2009, but this is normal given low oil prices, says Ayman Asfari, group CEO of Petrofac Ltd. Still, “cash-rich national oil companies are continuing to invest despite the slowdown, with many seeing this as an opportunity to make investments in a deflationary market and realize their capital expenditure at lower costs,” he says. Petrofac has secured contract awards worth $6.9 billion so far in 2009, Asfari says.
Metals prices have had an impact on the international market. “The drop of commodity prices provoked the interruption of the investments in mining and metallurgy and also has had an impact on the funding capacity of the countries,” says Paulo Lacerda, vice president of operations of Brazil’s Odebrecht.
Smaller Firms at Risk
Arafa says the financial crisis has had its greatest impact on smaller, less-capable construction firms working in the international market. He says the construction sector is highly leveraged, so banks may revise their policies on lending in the industry. If this happens, “many small and medium companies will go out of business,” Arafa says.
Many contractors agree. “The tightening of credit facilities by banks could drop small contractors out of the construction market,” says Aziz M. Bassoul, director and CFO of Lebanon’s C.A.T. Group. “Demand over the last few years has meant that the smaller contractors grew in size and will now most likely shrink back to original pre-boom levels or disappear altogether,” says Thomas Patrick Barry, CEO of Dubai-based Arabtec Construction LLC.
Infrastructure Lift
While the recession has taken its toll on construction markets, many big European contractors are being buoyed by infrastructure orders. “We are growing the business this year...and I suspect we will be no less busy next year,” says Ian Tyler, CEO of the U.K.’s Balfour Beatty Group. “We had only a couple of projects canceled, one in Russia and one in Dubai,” adds Michel Cote, deputy chief executive of France’s Bouygues Construction.Germany’s Hochtief A.G. has “a steady flow of new orders,” comments Herbert Lütkestratkötter, CEO. On average, the firm has 19 months’ work, with individual units reporting “at least one-year visibility,” he adds. “That’s a good cushion.
”Italy’s Impregilo SpA is leading a consortium that is once again working on the vast Messina Strait bridge project. The multibillion-dollar link to Sicily was revived by Italy’s Prime Minister Silvio Berlusconi after being dropped by the previous administration. Impregilo’s CEO Alberto Rubegni hopes the estimated 72-month project will start next year.
Civil engineering “is less impacted than building, and we are seeing the stimulus packages, especially in the U.S., have started to kick in,” says Johan Karlström, CEO of Sweden’s Skanska AB. “A lot of states have decided to support the economy by launching significant infrastructure projects,” adds Cote.
Arafa of Al-Arrab agrees. He says large, government-financed infrastructure projects have kept the construction industry in many countries afloat. “The public sector, in return, gets to carry out these projects at bargain prices compared to one or two years ago,” he says.
However, Ilicak of Renaissance Construction points out that most of the national stimulus packages will not necessarily benefit international contractors. “The political importance of supporting and preferring local companies, especially with state-financed projects during tough times,” is a big roadblock to international firms’ expansion, he says.
On the other hand, the economic downturn has had less impact on many developing countries’ infrastructure plans. For example, China Civil Engineering Construction Co. is now undertaking numerous huge infrastructure construction projects in Africa and the Middle East, including major railways in Nigeria, Algeria and Libya, says Liu Zhiming, vice chairman of CCECC. Liu says the cost of each of these projects reaches into the billions of dollars.Contractors have mixed feelings about midterm prospects and how governments will deal with huge deficits. “What will be the situation of France in 2010? The crisis may be over, but the [government] debt might be huge,” says Cote. The issue is a “huge matter of concern.
”Tyler is more optimistic. He foresees no major collapse in public-sector work in the next few years, and he expects new opportunities to emerge from the crisis. “Thoughtful, intelligent outsourcing is going to be a major part of getting [public] spending down,” he says.
P3s Down, But Not Out
Cote and Lütkestratkötter both report bids for some public-private partnerships (P3s) being delayed by the introduction of stimulus packages. However, Tyler is also guardedly sanguine about the market for P3s despite the reduction in banks’ willingness to lend. Balfour Beatty secured $2.4 billion of debt for four deals this year, he says. However, Tyler is concerned about the impact of rising financing costs on future projects’ value for money assessments.
Lütkestratkötter reports no decline in the volume of new P3s. However, he says they will feature an increasing cost of debt and the need for contractors to increase their equity exposure in projects. He believes the need for public entities to cut spending in the future will stimulate interest in P3s, which, he claims, are 15% more economical than conventionally procured jobs.
Privately financed high-speed railroads are set to provide vast construction orders in France in the next few years, notes Cote. Bouygues is in one of three teams that recently tendered final offers for the biggest of the projects, the 300-km Tours-to-Bordeaux line, he adds.“Financing is harder, takes a longer time and costs a little more, but it is doable,” says Karlström. Skanska was boosted in recent months by two large, highway P3s: One is to widen and maintain for 30 years the U.K.’s M25 London beltway; the other covers construction of 62 km of the A1 in Poland.
Italy’s Impregilo is looking for new toll-road concession markets now bidding in Abu Dhabi. The firm is “one of the biggest operators in concessions,” says Rubegni. It has toll roads around Latin America but shows no interest in bidding for existing highways in the U.S. “We prefer to do greenfield concessions. We are a construction company,” explains Rubegni.Some international contractors are concerned that owners are taking advantage of the recession to squeeze contractors. “After the tendering stage, several clients are trying to practice ‘Dutch auctions’ by asking the first two or three lowest bidders to cut down their prices, and this process is often taking several rounds of discussions and price cutting,” says Bassoul of C.A.T. Group. He says some clients are requesting price reductions after the contract awards, not only on running projects but also on previously completed contracts. “The economic downturn has also triggered the renegotiation/respecification of contracts,” says Barry of Arabtec Construction. He says over the past six months, clients have started to ask for repricing on contracts for projects not yet under way.
Asian countries, where banks were more tightly controlled than in the Europe and America, have been less affected by the crisis. Hong Kong and Singapore “are going to be good, strong markets, particularly for infrastructure,” says Tyler. Lütkestratkötter agrees, saying Hong Kong has “the strongest and most robust stimulus package in that region.
”But mainland China remains “a closed market” for contractors, Lütkestratkötter says. Australian mining work remains “very strong” despite reduced commodity prices, he says. He also is encouraged by the Australian government’s support for infrastructure, notably through P3s.
In the Middle East, Balfour Beatty “reduced the head count substantially,” but the market “is returning—even Dubai,” says Tyler. Impregilo has seen big energy and desalination projects in the region delayed. But “we expect, at the end of the year and in 2010, all the investment plans will be ready to start,” says Rubegni. Hochtief has been hit “to some extent,” but “we are very strong in the region,” says Lütkestratkötter. “It’s very important we are perceived as a local company.”
Not So Slow
Not everyone is finding the Middle East to be slow. “We are finding the greatest opportunities for business in Saudi Arabia and Abu Dhabi in the oil-and-gas sectors,” says Bassoul of C.A.T. Group. However, Qatar has been disappointing because of delays in the decision-making for the awards of contracts, he says.
Asfari says enhanced oil-recovery (EOR) projects are becoming more important worldwide, not only because they enable better use of oil fields already in production but also as they can, in some cases, be combined with CO2 capture and storage. “In the Middle East, the presence of many large, well-developed oil fields makes EOR particularly attractive as even relatively small improvements in the ultimate recovery often equate to significant additional production,” he says.
However, not all work in the Middle East will be in the energy sector. Arafa of Al-Arrab says the Saudi market remains solid. “The impact we have observed in the Gulf countries and the Kingdom of Saudi Arabia is rather slight,” says Cenk Bugdaycioglu, secretary general of Turkey’s GAMA Industry Inc.
“The focus for the industry over the next few years will be on infrastructure projects, where there is planned spending of $2 trillion in the Gulf Cooperation Council countries, predominantly in Saudi Arabia,” says Barry of Arabtec Construction. He says there continues to be high demand for housing and infrastructure in Abu Dhabi, and Saudi Arabia will need an additional two million housing units with supporting infrastructure in the near future.In Europe, Russia “was hit most” by the crisis, says Lütkestratkötter. “We are far behind where we expected to be, but we keep our presence intact,” he says. In Russia, “we almost stopped,” adds Bouygues’s Cote. The Czech Republic and Poland have “huge public deficits, and they have no money spend,” says Skanska’s Karlström. However, Poland remains “quite active” partly because of the country’s adoption of P3s, he says.
In Africa, Rubegni sees continuing potential in Algeria and also in Libya, where Impregilo is bidding for the Tripoli metro job. The firm recently won work on a pumped-storage job in South Africa.No one knows when the downturn will end, but many top executives remain upbeat. “The economic recession is expected to be over by the beginning of next year, and we are optimistic that the trend will turn upward and new business opportunities will flourish,” says Bugdaycioglu of GAMA Industry.
