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Neville Simms Reasons for new year optimism

What a year that was! Growth in construction output above trend, skill shortages, the Egan report and improved margins for many in the industry. A year full of challenges to test the best management teams.

But, after entering 1998 with confidence that we could expect at least two years of above average growth, by the end of the year events had conspired to create a business climate that made construction companies increasingly pessimistic - notwithstanding the three interest rate cuts in the last few months.

This pessimism may be understandable, given the problems in manufacturing industry and the growing signs of a slowdown in the services sector, but is it warranted?

I believe it is overdone because, although private sector activities will slow down, a rise in government investment planned for the next three years should lift construction volumes in the public sector and begin to address the UK's historic under investment in our built environment.

Looking more closely, I can see four reasons for some optimism:

First, I expect a continuing steady flow of Private Finance Initiative projects. With £11bn of projects signed and the Government projecting a further £11bn to come over the next three years, PFI will continue to have a positive impact on construction activity.

Next, the Millennium projects, although something of a hostage to fortune in terms of completion, will continue to offer a great opportunity to demonstrate to both our clients and the general public what the best of our skills can produce.

Third, and specifically in respect of civil engineering, where conditions will remain difficult, there will be at least two major contracts and plenty of rail infrastructure work generating activity. This will, to some extent, protect the UK's civil engineering skills base.

Finally, and probably most importantly, significant consolidation and restructuring will continue as many companies in our industry try to enhance their shareholders' overall returns, to structure themselves to deliver what their customers want, and to position themselves for a less optimistic outlook, while still holding on to improved margins.

Last year much was written about restructuring and consolidation but little delivered: Bovis and WS Atkins, Tarmac and Aggregate Industries, Lovell and Mansell all failed to agree a deal. Perhaps the result has been that there is now a greater understanding of the underlying value of the businesses in our industry and how that value might be released. Maybe next time it will work out more satisfactorily for companies and shareholders alike.

So who knows what deals will be delivered this year, but delivered they must be, because I believe that 1999 provides an excellent window of opportunity. Watch this space.

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