ENR 2019 Top 250 International Contractors: Global Market Is Risky Business
The global construction market is sluggish and has been for several years. After enjoying boom years from 2012 to 2014, the bubble burst, leaving international contractors scrambling. This stagnation has created a severe buyer’s market that has had negative, and in some cases final, consequences for firms.
The uncertainties in the international market are seen in the 2019 results of the ENR Top 250 International Contractors survey. This list ranks companies based on contracting revenue from projects outside their home countries, measuring presence in international commerce. ENR’s separate Top 250 Global Contractors list ranks firms’ total worldwide contracting revenue, regardless of project location.
The Top 250 International Contractors reported $487.29 billion in contracting revenue in 2018 from projects outside their home countries, up only 1% from $482.40 billion in 2017. As a group, firms also reported $1.148 trillion in revenue from domestic projects in 2018, up 10% from $1.043 trillion in 2017.
However, the modest rise in the international market does not reflect its struggles. This past year’s revenue figures are off by 10.4% from five years ago and were falling steadily until 2017. The small recovery comes at a price. Owners around the world have seen large contractors fighting for work and have used this desperation to impose increasingly tough conditions in contracts, pushing more risk onto companies.
This risk shifting has begun to take a severe toll on some major international firms. Last year saw the failure or near failure of several major companies, beginning in January 2018 with the collapse of Carillion, one of the U.K.’s largest contractors. Spain’s Isolux Corsan soon followed, and Joannou & Paraskevaides (Overseas), the largest unit of Cyprus-based Joannou & Paraskevaides Group, defaulted on bank loans and now is under court supervision. The owners of J&P are in court to break up the company.
Italian contractors had more than their share of problems. Trevi-Finanziaria Industriale SpA and Condotte d’Acqua SpA are under court administration and are selling off assets. C.M.C. di Ravenna is in bankruptcy reorganization, as is Astaldi after defaulting on a series of U.S. contracts.
Brazil’s Odebrecht SA, reeling from the impact of the “Operation Car Wash” bribery scandal that implicated numerous contractors and officials in 11 countries, filed for bankruptcy protection and reorganization—possibly the largest debt-protection filing in the country’s history.
Many large international contractors now are taking action to limit exposure to risk in international markets. After sustaining significant quarterly losses from bad projects this year, Fluor and McDermott, both from the U.S., have established board-level risk review committees to oversee their firms’ exposure to cost overruns. New Zealand contracting giant Fletcher Building said in early 2018 it was leaving vertical markets after losing $425 million over the previous year.
Fluor, Granite Construction from the U.S. and Canada-based SNC-Lavalin also announced recently that they are leaving fixed-price, turnkey markets after experiencing major losses. Fluor will continue to pursue fixed-price work in energy and chemicals markets, but only where there are limited bidders and it has a measurable advantage over competitors.
International contractors are becoming increasingly wary of risk exposure and project management expertise. “Our experience in the international market is that it’s a punishing environment,” says S. Paramasivan, managing director of India’s Afcons Infrastructure Ltd. But he says the firm’s commitment to risk management and operational efficiency has allowed it to complete all 50 of its international projects over the past decade on or ahead of schedule.
European firms seem content with current revenue trends, but satisfactory margins are more elusive. Jérôme Stubler, chairman of France’s VINCI Construction, says, “2019 will be another year of growth in revenue.” While pre-tax profits have risen nearly 20% annually over the last three years, the current 2.8% operating profit still falls 2.2% short of Stubler’s target. “I believe all contractors should have a 5% target when I see the levels of [their] risk and effort,” he says.
Despite “challenging” residential markets, Sweden’s Skanska AB is pushing to improve construction profitability by selective bidding, especially in Europe, says CEO Anders Danielsson. Its 6.2% gross margin in the first half rose 1% from last year. Bidding selectively in difficult markets, Skanska’s backlog is 11% below work done in the last period.
Thomas Birtel, CEO of Austria’s Strabag SE, is “astonished” how good this year has been for the firm. Despite disruption in core markets by the U.S.-China trade war and Brexit in the U.K., “we don’t see any material negative impacts,” he says. Strabag reported 19% sales growth in this year’s first quarter, pointing to a projected 3.3% [earnings before interest and taxes] margin in 2019, says Birtel, who aims for 4% next year. This level of profitability is satisfactory for a “pure play construction company,” he believes.
In Europe, Milan-based Salini Impregilo SpA is on the acquisition trail both to increase its global footprint and help revive Italy’s fragile contracting industry in what the firm calls Project Italy. This month, Salini Impregilo secured $673 million in financing to reinforce its balance sheet and invest $252 million to buy profitable parts of Astaldi SpA, the country’s second largest contractor, which is under court administration. Italy’s CDP Equity SpA committed $280 million and the Salini-family controlled Salini Costruttori SpA $56 million; banks are investing or underwriting the remaining portion.
With only about 10% of its sales from Italy last year, Salini Impregilo believes its small domestic base weakens its international competitiveness. In contrast, VINCI is active in nearly 100 countries outside France, but its overseas work accounts for only about half of sales.
For Salini Impregilo CEO Pietro Salini, the Astaldi transaction is a stepping stone in Project Italy, which aims to help revive up to $40 billion of Italian projects blocked for various reasons and also to consolidate viable elements of financially struggling contractors, such as Astaldi. In Italy, “the whole industry is in trouble … we are the last man standing,” says a Salini Impregilo spokesman.
Salini Impregilo says it is “really interested in” China’s controversial Belt and Road Initiative (BRI), having worked on related projects in Kazakhstan and Turkey. Italy, the only G7 country that embraces the huge program, penciled in over $2 billion of Chinese co-financed deals during President Xi Jinping’s visit to Rome in March. In neighboring France, Salini Impregilo is rare among foreign contractors to win major contracts on the huge Grand Paris Express metro expansion program. “We are making great progress in France, where we intend to expand,” says Salini.
But non-French firms will have little role in restoring the fire-damaged Notre Dame cathedral. Among the first to offer its services, VINCI has proposed a “skill-based sponsorship exactly like the one used in the restoration of the Hall of Mirrors at the Château de Versailles a few years ago,” says Stubler. The government “is still looking at ways to organize this mammoth restoration challenge,” he adds.
While Germany’s economy is slowing, its infrastructure sector has undergone “double-digit growth” and will plateau at a high level while the real estate market is “already at boom levels,” says Strabag CEO Birtel. Austria’s infrastructure sector is “not as dynamic,” but is consistently good, he adds.
Busy in European Union member countries in central and eastern Europe, Strabag is “very positive” about Poland and Hungary, says Birtel. Russia’s attraction has greatly shrunk since its peak in 2013, but Strabag is not quitting. “Sooner or later Russia will recover,” he says.
A new entry to the European scene is Turkey’s Renaissance Construction. It acquired Ballast Nedam of the Netherlands in 2015. “Streamlining the processes and merging the technologies of Ballast Nedam into the holding company created enormous opportunities for us,” says Emre Baki, board member of Renaissance parent firm Ronesans Holding.
Birtel worries about how the loss of U.K. contributions to EU budgets post-Brexit will affect the region’s infrastructure projects. He hopes the shortfall will be made up by a revival in public-private financing, which is now “not in vogue in Europe,” he says.
In the U.K. itself, a fall in building foundation work reflects a decline in commercial building in the run-up to Brexit, according to Stubler. VINCI is among preferred bidders for a large design-build contact on the HS2 London-to-Birmingham high-speed railroad, which now is under review. “We hope Brexit will not adversely affect the U.K.’s willingness to develop HS2,” he says.
Skanska is also feeling a Brexit dip in U.K. non-residential construction, and “the civil market is a bit slower,” says CEO Danielsson. Because of Brexit, and the restructure in Poland and the Czech Republic, the contractor’s selective bidding has left it with a European backlog of only 70% of what it had in the last reporting period, he says. However, the company is more than replacing work in the Nordic regions, where it earned a 3.6% construction operating margin in this year’s first six months, with Sweden providing a 3% margin.
Middle East Tumult
The Middle East market has been a destination of choice for international contractors for many years. However, with the radical drop in oil prices in 2015, regional prospects were thrown into turmoil. With oil and gas as a major contributor to the Gulf Cooperation Council (GCC) countries’ economies, projects not just in the energy sector but in infrastructure and beyond became more tenuous.
“In the Gulf countries, except for Saudi Arabia, the difficult market situation keeps translating with cautious spending and investments from our clients, harsher contractual conditions and hungry contractors with a high appetite for risk,” says Aziz Bassoul, acting CEO of Lebanon’s C.A.T. Group.
This has led to a scramble for many international contractors to find work. “The Middle East market is still difficult due to its high competition among the bidders and clients’ excessive policies such [requiring greater participation by local companies],” says Kim Chang-Hag, CEO of South Korea’s Hyundai Engineering Co. Ltd. He says that many Indian and Chinese EPC contractors are “engaged in price dumping” to gain work.
Many international firms are moving cautiously in the Middle East, making sure that projects fit their portfolio and that owners are financially stable. “Most GCC countries seem to be on a ‘wait-and-watch’ mode that raises questions about their ability to finance large infrastructure projects, and to maintain cash flows, which could lead to stretching of timelines for approval and execution of both current and fresh projects,” says S.N. Subrahmanyan, Larsen & Toubro CEO.
However, Subrahmanyan says GCC members have taken steps to ensure their economies are in good shape by agreeing in 2016 to implement a 5% value-added tax in their respective countries. Saudi Arabia and United Arab Emirates introduced the VAT on Jan. 1, 2018, to boost revenue and revive their oil-dependent economies, and Bahrain followed suit at the beginning of this year. Kuwait and Oman pushed back planned implementation of a VAT until 2021, and Qatar is still considering it.
But many international contractors report they are doing well in the Middle East. VINCI is “strong” in Qatar and is active across the region, says Stubler, adding that it “still has substantial scope for investment.” But, notes Strabag’s Birtel, the Middle East is “still a difficult market.” The company left Saudi Arabia last year but remains in the Emirates and Oman.
Land of Opportunity
The North America market is one of the largest for international contractors. The U.S., Skanska’s biggest market, is “very strong … both in civil and building work, but there is still fierce competition,” says Danielsson. While not satisfied with a 1.2% operating margin, “we are definitely on the right path,” he adds.
Salini Impregilo also counts the U.S. as its largest revenue generator, “full of opportunities and where we want to apply even greater focus” it says. Local subsidiary Lane Industries is targeting $64 billion in potential infrastructure work in regions including Texas, California, Florida and New York.
After a lean period in North America, VINCI recently won a slice of a $3.3-billion design-build contract on Virginia’s I-64 highway in a joint venture with units of Spain’s ACS. It also won work on a design-build-finance contract covering 27.5 km of light-rail infrastructure in Ottawa. In North America, “prices may be returning to a more reasonable level,” says CEO Stubler.
The U.K.’s largest contractor, Balfour Beatty plc, now earns over half its sales in the U.S., totaling $2.1 billion in this year’s first half. While U.S. prospects are “phenomenal,” the civil sector there remains “Neanderthal in terms of how it contracts, and it hasn’t matured to the point where the U.K. business and market is,” says CEO Leo Quinn. In the U.S., “an awful lot of hard bidding goes on [with] fixed, guaranteed maximum price that can carry superior returns but [also] superior challenges,” he adds.
By contrast, in the U.K., the company’s portfolio is “dominated” by collaborative arrangements such as early-contractor involvement and, more recently, cost incentivized fees. Quinn says with these contracts, the contractor secures a guaranteed fee and overhead and operates under a narrow-band pain-gain formula under which “you never drive contractors into loss.” He hopes the U.S. and Hong Kong, the firm’s other core market, will follow the U.K.’s lead.
In Latin America, Strabag seeks more work on the heels of Colombia’s Medellín-Santa Fe de Antioquia Autopista al Mar 1 private financed deal, which reached financial close this past March. It is the first P3 project outside of Europe, where the contractor has previously secured 40. The company also has long performed work in Chile’s mining sector, which is being boosted by the need to go underground as surface deposits run out, says Birtel.
A recent arrival in Australia and New Zealand, VINCI has won some “important projects” over the last 18 months there, says Stubler. Last month, in a joint venture, it secured a $1.1-billion design-build contract for 3.45 km of mostly tunnelled urban railroad in Auckland, New Zealand.
After six years of activity in the country, Australia has become a “key market” for Salini Impregilo, it says. This year, the company secured a civil and electromechanical contract on the 2,000-MW Snowy 2.0 hydro project in New South Wales. For Strabag, Australia is “a long way away,” says Birtel, but “there could be a boom for somebody like us.”
The international market has been sluggish, but it still holds opportunities. However, it presents risks that are no longer acceptable to many large contractors. Whether the failure of several large international contractors, and the refusal of several more to accept onerous fixed-price contracts, has an impact on larger market dynamics is yet to be seen. But the warning signs for global owners are there.