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 75.

    Many have commented that we should build more council houses. But figures released today show that 47% of children under 16 live in one parent households. It is family breakdown that is putting a strain on the housing market. Two homes are now required rather than one for 47% of families with children.

  • rate this

    Comment number 74.

    @50 McGill
    such a simple solution.... apart from the billions it would cost to do. to rent these houses out paying the housing benefit for the tenants, more cost on us taxpayers.
    maybe not the only simple thing = think about it spending billions on council housing only ADDS to our small debt £1.2+ t

  • rate this

    Comment number 73.

    Also although this article isn't about house building (Balfour Beatty are infrastructure construction). People keep saying build council houses the problem with that is most people like myself who earn a decent wage, but with two children have no chance of raising the sort of deposits banks are asking rent privately. Whereas people who now live in council houses can't afford to buy period.

  • rate this

    Comment number 72.

    Construction is down massively from its peak but that is only because there was too much contruction as a result of the 70/30 rule and PFI. BB and construction in general had it too good and must now operate in a normal market.

    The 70/30 rule gave us few houses but lots of unneccessary flats and PFI gave us high CAPEX/OPEX new schools and hospitals at an average cost of 17% pa over 20 years.

  • rate this

    Comment number 71.

    The biggest problem is the myth that the private sector is more efficient than public. I've worked on a number of large scale infrastructure projects and currently working on the biggest one outside of London the level of inefficiency, poor planning, cost analysis of the works is beyond horrific. It's barely a year in and is projected to be millions over budget & will finish at least a year late.

  • rate this

    Comment number 70.


    You are making the mistake of believing these people give a rats arse about anyone else.

    it's nowt to do with 'conspiracy theories', these people really don't give a monkeys.

    Why should they ? Their egos are salved by directorships, not contented citizens.

  • rate this

    Comment number 69.

    UK construction industry is on its knees.

    This is the first tangible evidence that the UK economy has been irrepairably damaged by an incompetent chancellor.

    Construction is the heart of every economy in every country and ours is having a major coronary.

    The hardships that will become necessary to the lives of millions of hard workers will cause social chaos.

    Future: Cold, dark, hungry, crime

  • rate this

    Comment number 68.

    Too easy to confuse the economy for the welfare of the nation. Point squit of a percent up or down and one or other party will crow over the other.

    And still infrastructure, that lasts longer than a parliament, is first to get ditched. Is no party prepared to leave a positive legacy?

  • rate this

    Comment number 67.

    Seeing we are on the building industry could the many new small entrepreneur's be the same people who used to earn a nice living before the jobseekers allowance without the stress of being in business proper

  • rate this

    Comment number 66.

    Not all that long ago, the Balfour Beatty Board of Directors awarded themselves huge salary increases on the basis that it was "necessary to attract and retain the brightest Management talent".

    And what happens, the brightest management talent "manages" to overlook a £50m liability in its own accounts.

    But of course it will be workers who are axed and not the managers.

    UK has had its day.

  • rate this

    Comment number 65.

    The fascists are in charge worldwide, they used to be capitalists, but managed to create such a technologically enhanced blue sky thinking "derivative", whatever, bubble that they killed capitalism, they're all bankrupt in reality, and have been financially, since 2007, only fascism could save the power status-quo and that is what they chose. Wake up people already.

  • rate this

    Comment number 64.

    Am an old person.Retired 10 years ago.Have received a Bus Pass.And am now entitled to a free TV Licence etc..
    Why do people assume that my Bank Account,is healthier than thier Bank Account?
    Someone needs to define the Annual Income of a wealthy Pensioner...
    Anyone care to name that figure?.
    It will not be a Politician.

  • rate this

    Comment number 63.

    Wonder if the builders will show as much resentment towards brown as the miners did to thatcher .

    remember most in the construction industry do not show up as unemployed as they simply keep on going with limited income .

  • rate this

    Comment number 62.

    Has the crunch been a mis-deathknelling scandal?

  • rate this

    Comment number 61.

    Let it be 2015, and let the removal vans remove them justly.

  • rate this

    Comment number 60.

    But spare a thought too for the poor, the sick, the old, the foreign, the lost, the orphaned, the autistic, the latchkeys, the teens, the robbed, the depressed, the addicted, the misfits, the forbidden-to-dreamers.
    All kicked in the sore bits by the Torydem Bovver Boys ,the gimme-the pip UKIPs the tabloid terrorists, the beeb soundbiters.
    The rotten lot of them !

  • rate this

    Comment number 59.

    With the Housing Market showing signs of recovery, Infrastructure projects must be implemented to cut down on the unemployed and
    encourage other businesses to take on more staff and stabilize our
    economy at least. Ted Wilcock

  • rate this

    Comment number 58.

    Valuations UP! .....good offers BACK!
    Banks' control of valuers wanes, as low-levellers lose deals and buyers CHEER UP.
    Mark-to-market makes a Boomerang-Benefit.
    Safe is Sour!
    Capital and Equity reappear .
    Loans portable, people set free.
    Toxic becomes Ticketyboo.
    People buy ,build, and breathe.
    Ding-dong , the blip is gone!

  • rate this

    Comment number 57.

    Robert, is this right, that the Coalition, or at least the LibDems, really hoped for an efficient transition from public to private dominance, lower pay enabling higher dividends, trickle down from dividend-recipients allowing employment of others in second & third jobs, such support for elite life-styles attracting more & more billionaire investors from fleeced economies elsewhere, 2015 triumph?

  • rate this

    Comment number 56.

    How ridiculous the situation has become with the government keeping house prices artificially high,low interest rates,a refusal to build anywhere near enough new properties,council tax subsidising landlords.
    Anything to protect homeowners and banks,houses were treated as investments and not homes by many,and investments can go down as well as up.
    No recovery until land and house prices fall.


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