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 115.

    Maybe if builders built something other than pokey piles of dyed concrete blocks, covered with textured concrete tiles, lined with plasterboard, standing on a plot of land only maginally larger than the floorplan, on a floodplain or a pile of industrial rubble, then people would be interested in buying them, and trade might pick up.

  • rate this

    Comment number 114.

    "why it went wrong"

    Our aim should NOT be to single out politicians or bankers or claimants, not individually (to 'cast the first stone'), or as groups (in case 'there be one amongst them')

    THE reason 'everything went wrong' is that all (of us) were 'following orders', the orders of superiors 'beyond question', & of 'conscience for family' forced into conflict with 'conscience for UK'

  • rate this

    Comment number 113.

    #112 you have to understand what and why it went wrong b4 u can fix it.There has been gred at the top/bottom the UK , b it bankers or those on a life style choice of living of the taxpayers, For 13 years Labour encouraged both ends of the greed 1 2 feed other prob that aout 30% of the populus refuse to vote or event create a party that they would vote for and that is a big issue as well

  • rate this

    Comment number 112.

    Remedy for 'Brown'?
    For the long-departed?

    If a nation of 60 millions is universally subject to fear and greed, corruption from democratic purpose made inevitable and cumulative and disastrous, would it not be better to address the cause, rather than make a list of victim-perpetrators (omitting ourselves) starting with one or other of 'the georges'?

  • rate this

    Comment number 111.

    #110 and that corruption was at the top of the labour party agenda , using taxpayers money to buy votes , which was proven by Gorgess george Galloway and the way he got elected.

  • rate this

    Comment number 110.

    IR35_SURVIVOR @109
    "out of control"
    A free society?

    An exclusive focus on 'Brown' will ensure the missing of 'reality'

    Beneath the mass of symptoms, the phases of illness under every regime (not least Thatcher & Blair & Cameron), there is an underlying diagnosis, of multi-faceted corruption from democratic purpose, its remedy in education and agreement on 'Rule Of, For, By, the Equal People'

  • rate this

    Comment number 109.

    #108 the DEBT / TAX spending FUELLED largesse of the Brown area will have lasting effects for the UK. This article jus tshows you how out of control the economy was up til lthe crash of 2008 and we again going to get no were near that level for 20 years until all the debt and INTEREST has bee nbrough down to a sustainable level

  • rate this

    Comment number 108.

    @ 106 - I'm not sure what point you're trying to make. Could you elaborate?

  • rate this

    Comment number 107.

    Yet another example of the price business is paying for the rotten policies of this dog of an incompetent govt, with their ill thought out Economic Sanctions depressing the Economy and great businesses in its dash for cuts. What good is it reducing Corp Tax at a time when profits are being depressed, and what govt cuts Investment spending at a time when it is needed the most?

  • rate this

    Comment number 106.

    just goes to prove

    labour is not working
    labour has never worked
    labour will never work

  • rate this

    Comment number 105.

    Good, serve them right really. Stop building on ANY green field site.

    House prices need to collapse, rates need to be high, 30% deposits should legally be required, no more than 2.5x basic pay loans. If builders can't make money now they better give up!

    We also need a lower housing rung single room containers or similar, all in town, purchase and rent. All on benefits use that or nothing too.

  • rate this

    Comment number 104.

    29th April 2013 - 19:43
    House prices must come down and interest rates go up.

    Painful but it has to happen.

    Presumably you have already paid off your mortgage? . . . .

  • rate this

    Comment number 103.

    This article fails to recognise what I have said that the country is still in DEPRESSION. We need infrastructure projects now so that when growth comes we can manage the needs of workers, poor people and eventually, when they start paying more tax, businesses. Failure to spend now will lead us onto a very dangerous path. Analyse Greece, Spain and Italy and what they are being subjected too.

  • rate this

    Comment number 102.

    Things must be getting back to normal banks are starting to make obscene amounts of profit again.

  • rate this

    Comment number 101.

    "lot of nonsense"
    Why add?

    Even in trouble, need to spend, cash or credit, to stay alive & invest for future, concern being to use Talents (as in the parable) rather than bury ourselves in the pile of austerity corpses

    The "grief and humiliation" we have given freely to the citizens of southern Europe, & considerably to the millions of 'excluded' at home

    To be positive, not to "bully"...?

  • rate this

    Comment number 100.

    From the article...

    'In the meantime, margins for project managers and contractors ... have been shot to pieces.... another reason is that margins on new contracts are super tight ... dare not squeeze those businesses that work for it any more, for fear of driving them under.

    You believe that? Margins are tight and Balfour Beatty worries about its subbies?

    I've got this bridge to sell you.

  • rate this

    Comment number 99.

    Everybody except call me Dave and Champaign Charlie knows that Austerity has failed. Watch Bloomberg TV and even they are now saying Austerity has failed!! it was a bad idea from the start . The Germans know it, we know it . talking down the economy from even before their election win has scuppered the Tory chances of an general election win because its now too late to turn the economy around

  • rate this

    Comment number 98.

    Land hoarders won't release their land at anything other than pre-2008 values.

    Builders won't build houses at anything other than pre-2008 values.

    Home owners won't sell houses at anything other than pre-2008 values.

    2008 was the last inflation of a very large bubble. Stop clinging on to those valuations!

    I got sick of extortionate rent and bought an overpriced house this year = no spending!

  • rate this

    Comment number 97.

    What this means is that governmentagain force consumers to pay more and own nothing.

    Its relative to forcing UK public to buy hire cars for a hire car firm and then guaranteeing that the public hire the cars at inflated prices.

    Its a ripoff con, only real beneficiarys are energy companys executives & shareholders, public/consumers pay for everything & own NOTHING.

    It is outrageous.

  • rate this

    Comment number 96.

    A lot of nonsense on this I have to say. Spending your our out of debt would have broken us, the grief and humiliation would have been a shocker. The left caused this mess, the right are struggling to sort it this time, as usual. No sympathy for developers who bully local people for profit, shame for the British worker who with the open border is struggling. Ed balls Robin Hood? Smirking clown.


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