Balfour Beatty and the great construction depression

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.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 55.

    The great construction plan over the last 20 years seems to be to dig one very large, deep and expensive hole. Need construction that helps the private sector. Building hospitals and schools only add to the too big public sector. Energy, hydro, water, broadband projects can help all businesses. New business parks and cheap housing projects would also help. Reduce immigration - Swiss will from 2014

  • rate this

    Comment number 54.

    The correction is coming and is inevitable and will involve social chaos unseen in the modern era. House prices must collapse and they will take the services economy with them, and the pound as it is all one big pyramid scheme, that will fold soon.

  • rate this

    Comment number 53.

    We cannot go on borrowing money to prop up private landlords and speculators.

  • rate this

    Comment number 52.

    House prices must come down and interest rates go up.

    Painful but it has to happen.

  • rate this

    Comment number 51.

    There is too much grasping for short term profit and not enough long term social thinking in this country. I will never get on the property ladder with my wages in the current environment but yet renting costs me more than a mortgage would, this just cannot be right. All that is happening is people like me are paying a private landlords mortgage.

  • rate this

    Comment number 50.

    The answer is so so simple, build council houses:

    Reduce unemployment

    Reduce the housing benefits bill

    Increase tax revenue

    Kick start the economy

    Boost growth

    Everything the governments says it wants, all they have to do is do it.


  • rate this

    Comment number 49.

    Things can get much worse. This ship is made from concrete and iron. She can founder and fully sink. Did no one ever mention all other civilizations that have perished after a building splurge. Hope all you can but the dream is over and the seasons are rapidly changing.

  • rate this

    Comment number 48.

    Re the property market: How many times can you kick a dead horse and one that is very dead for a very long time? Sometimes I feel like switching off this website & the news and come back to it in 10 years time when people will have finally woken up to the fact that property is over priced and people are finally free of ignorance & realise the actual root causes of excessive personal debt.

  • rate this

    Comment number 47.

    #45 the answer to that is is to reverse the uncontrolled immigration that was allowed from 1997 for political reasons and also through those in jail for allowing it to happen in the first place.


  • rate this

    Comment number 46.

    To Purple 33 please let us know the name of any contractor who is making 30% net profit after tax. Even in good times it is very competitive.
    Even if the Govt set up £1,000m for projects today it takes time to design before site works starts. My experience with a Govt department suggests that the period from design end to start can be up to two years for review. Dont expect much to happen soon .

  • rate this

    Comment number 45.

    There are 1000's of unused green field sites that could be built on,but too much opposition from the green belt brigade who generally neglect the fact that the house they're living in, was built on what was once part of the green belt itself.
    Also,saving the green belt actually means,keeping the value of their houses high,usually Tories on Parish Councils object the most,selfish and small minded.

  • rate this

    Comment number 44.

    What are you trying to tell us Robert?
    Do you think Joe Public can afford to save our Finance Industry and at the same time save our Construction Industry?

  • rate this

    Comment number 43.

    Construction always fair badly during a recession.
    Private and Public Capital build is hampered by the 20% VAT.
    Social Housing costs more than Private developments, up to 20% more, this can be reduced.
    The H&Construction Act needs to be improved for all, the abuse on payment terms by Client / Main Contractors is destroying the industry.

  • rate this

    Comment number 42.

    The problem with Govt led infrastructure can be if it is done in a rush with a lot of money thrown at them - partial or complete political vanity projects - is that costs can get out of hand & what is provided may be less useful or not even partially integrated with the existing infrastructure.

    Like other posters here, I can tell some tales ...

  • rate this

    Comment number 41.

    Why should the state get involved in big projects, even if only providing guarantees rather than funding. They will not help the economy now. They might in a number of years when the economy has already recovered, but such projects (eg. HS2) will take many years if not decades to come to fruition. So trying to use them as a means to boost the economy is just a waste of time and money.

  • rate this

    Comment number 40.

    approx 5% of the jobs are done by immigrants, thats 1_500_000 people , then there are thier dependants, up to 5_000_000 in the UK. Just do the maths, they need somewhere to leave. So you either build on the whole of england or they have to go home , which means we need less house, price falls, also 1_500_000 more are employed everyone is happy then

  • rate this

    Comment number 39.

    FTB with a deposit. We are actively looking for somewhere to start our family life. We are 3 and currently in a 2 bedroom flat. It is a nice flat but we'd like a garden for the little'un and I'd like to grow a thing or two.
    Where we live the house at 45k in 1998 and 150k in 2007 ppl are asking 180+ now. Plus the stuff on the market is a bit crap. If you what to kick start what r we suppose to buy?

  • rate this

    Comment number 38.

    PACS complaint about infrastructure spending being just a rag-bag of ideas is about all it ever was in the first place.

    When there is financial trouble infrastructure is the first to be cut. Currently the cuts have gone on too long because the banks are bust and the state is heavily indebted.

    You can save some of the economy some of the time but not all of the economy all the time.

  • rate this

    Comment number 37.

    Above all priority it is neccesary to allow the younger generstion a property boom because it will kick start everything. There is of corse a vested interest in preventing self build becoming an economic factor.

    It was done before with council home discounts and can be done again. It is costs and affordability. The banks should be falling over themselves to kick start it.

  • rate this

    Comment number 36.

    While there are good posts here please don't be misled by the pic at the top of the Blog. Balfour Beatty, if I understand correctly, no longer do houses. They are large scale infrastructure contractors or project managers on an international scale.


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