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Contractors File 2009: Storm warning

It’s been a sea change in trading conditions in the past two years for those companies represented in this year’s CECA/NCE Contractors File. But what does the future hold? Alasdair Reisner reports.

Since the first indications of the credit crunch in 2007, firms have had to reshape their businesses to cope as the UK moved from growth into recession.

Last autumn, in the darkest days of the downturn so far, there was a real danger of the economy blowing up in similar fashion to some of the biggest banks on Wall Street in the preceding weeks.

It was at this point that chancellor Alistair Darling stepped in an attempt to steady the ship. His pre-budget report promised a swathe of actions to revive the British banking sector, and the UK’s industries, to pull the country out of its fiscal nose-dive.

Among these measures was some seemingly good news for contractors. Darling released funding to accelerate the delivery of a host of infrastructure projects around the country to get this money flowing into the wider economy, while enjoying the benefits that such projects would deliver in terms of improved productivity. It seemed likely that, in the middle of a major downturn in the economy, the civils sector could experience a mini-boom based on this healthy slug of public sector spending.

Where is the spending?

While there are many in the industry who would question where this money has been spent (recent evidence from CECA members indicates that few have felt any impact from Darling’s fiscal stimulus) the government’s own figures state that capital budgets for transport will be higher this year in real terms than at any point in the past decade − more than £8bn of capital expenditure is on the table for the Department for Transport in 2009/10.

So everything appears to be fine. The civil engineering sector gets the chance to lead the UK’s efforts to build its way out of recession, while contractors get the chance to reap the financial benefits of growing workloads. Figures provided by contractors for this year’s Contractors File certainly seem to indicate that this is the case (see ‘Contractors File 2009: No need to panic’).

The flood of government spending to shore up the economy has come at a cost − a massive escalation in public sector debt. Whoever comes into power will have to remove this multi-billion pound weight .

Sadly this may be misguided. While we have recently seen the first indications of a change in the financial climate for the UK as a whole, with rallying equity markets and an apparent floor forming under falling house prices, causing commentators to start (perhaps prematurely) talking about the green shoots of recovery, the outlook for the transport sector looks bleak.

The flood of government spending to shore up the economy has come at a cost − a massive escalation in public sector debt. It is clear that whoever comes into power will have to remove this multi-billion pound weight around the country’s neck through increased taxation and reduced public sector spending. There are growing fears that such a reduction in public sector spending could hit the transport sector particularly hard, and the mini-boom could become a slump. Civil servants are already warning that there will be significant tightening of spending post 2010/11 and CECA has been told to expect a “cliff edge” in terms of the spending profile from 2011 onwards.

So what can be done? It is impossible to avoid the reality of the public sector budget deficit, and the need to pay it down.

A case for investment

While politicians will talk of achieving “efficiencies”, experience shows that this often means cuts. The task for the industry is to make an unassailable case for continued investment in transport, so that any cuts are directed elsewhere. The extensive appraisal process required before any major transport project gets off the ground means there is already significant evidence for the healthy return on investment created by transport spending.

This evidence now needs to be trumpeted along with the message that cuts would simply mean that for every pound saved many more would be lost in benefits to the economy.

The energy sector looks set to play a significant role in the future of the civil engineering industry.

And while public spending on transport seems to be the area of most immediate concern, it is also important that flows of work in other parts of the civil engineering sector are maintained.

The downturn has created tough conditions for the water sector, for example, and the regulator Ofwat’s call for reduced consumer water bills has obvious potential implications for the delivery of projects in the sector.

Preliminary works for housing and commercial development have historically provided significant workload for the sector, so any return in confidence from developers could lead to vital work that could cushion downturns elsewhere.

Finally, the energy sector looks set to play a significant role in the future of the civil engineering industry, particularly in the nuclear new build sector. The industry must work with the government to put in place the actions that are needed to open up this programme of nuclear new build. Doing so will not only secure the country’s future energy requirements, but also ensure a vital stream of work for the industry at a time when workloads elsewhere are looking uncertain.

  • Alasdair Reisner is head of industry affairs at CECA

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