Balfour Beatty and the great construction depression

  • 29 April 2013
  • From the section Business
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Builders at construction site
The UK's construction sector is still in recession

Is there a connection between Balfour Beatty's profit warning (shares have fallen more than 13% this morning) and the Public Accounts Committee's (PAC) critique of the Treasury's self-styled Infrastructure Plan?

Well the PAC is really talking about the future when it says that the Infrastructure Plan "is a list of projects, not a real plan with a strategic vision and clear priorities".

But there is a link, in the sense that the Infrastructure Plan is a response, in part, to the dramatic fall in public sector net investment from 3.6% of GDP in 2009-10 to less than half that today.

The Treasury has been trying to encourage the private sector to take on more of the costs of infrastructure projects, following its decision to cut direct investment spending as part of efforts to reduce the deficit.

Quite a large chunk of the deficit reduction in the early years of the coalition government came from cuts in investment spending.

And one reason why that deficit reduction is stalling for three years is a recognition by the Treasury that it might make sense - for the UK's current and future prosperity - to revive its investment.

Still in recession

As for Treasury efforts to unlock hundreds of millions of pounds from the private sector for infrastructure projects, through the provision of state protection against risks and guarantees of income, this is work in progress - work which the MPs on the PAC feel could be a bit more focussed and systematic.

That it has not yet resulted in any kind or serious renewed building splurge has been evident in the official statistics.

In the first quarter of 2013, construction output fell 2.5%.

This sector is still massively in recession, with output down 5.9% over the course of the year to the end of March and it is a painful 18.1% below the peak of five years ago.

The biggest contributor to that slump was the boom that turned to bust in debt-financed property development (so it is a big hello to HBOS, the bank which almost went bust in part because it liked to say yes too often to the more intrepid - ahem - of developers).

But the government's squeeze on its own investment spending and a review-induced hiatus in privately financed public sector projects have also contributed to the big market squeeze.

The Treasury is trying to move the pendulum back towards investment and away from current spending, by - to simplify slightly - squeezing benefits payments and allocating the savings to infrastructure.

But that is a longish, slowish process.

Super-tight margins

In the meantime, margins for project managers and contractors such as Balfour Beatty have been shot to pieces.

Balfour Beatty concedes that part of the reason its profits for this year will be some £50m lower than it thought only last month is that it hasn't managed all projects as efficiently as possible.

But another reason is that margins on new contracts are super tight and many of its sub-contractors are in dire straits - and it dare not squeeze those businesses that work for it any more, for fear of driving them under.

By way of an aside, Balfour Beatty's owners may well be a bit concerned that the company should have been wrong-footed in this way, given that the dire state of the construction market has been conspicuous for longer than a few weeks.

That said, the industrial background is a long way from being benign.

However, some in the industry tell me that things can't get any worse, that the animal spirits of the private sector are no longer draining away, and that this may be the instant of the turn.

Maybe the light at the end of the tunnel isn't the oncoming train but the diggers and construction equipment being switched on again.