It is notable that with this month’s completion of Acciona’s acquisition of Lend Lease’s Engineering business, all Tier 1 engineering & construction contractors operating in Australia are now foreign owned.
This is unusual for developed countries, virtually all of which have at least one locally owned major contractor participating in the local jurisdiction.
So how has this come about?
Regular readers of my articles will be unsurprised to find me referring at this point to American academic Michael Porter’s “5 Forces” analysis model as a way of gaining insight into what’s going on. To recap, Porter identified five interacting “forces” that determine the nature of competition within an industry and consequently, overall industry profitability:
- The bargaining power of customers (“Buyers”);
- The threat of new Entrants to an industry;
- The bargaining power of Suppliers;
- The threat of Substitute products; and
- The intensity of competitive Rivalry within an industry.
In the case of the infrastructure construction industry, State and Commonwealth Governments shape the market as Buyers of major roads, railways etc on behalf of users.
The last two decades have seen a range of new Entrants to the Australian scene, including major International contractors such as ACS, Acciona and Ferrovial from Spain, China’s CCCI, Italy’s Salini Impregilo (recently rebranded as Webuild) and France’s Vinci. Shifts in the following specific market barriers have enabled these Internationals to enter and/or consolidate their position:
- Capital requirements: The relative strength of the Australian economy and the sizeable pipeline of work on offer by International standards appears to have justified the investment requirements for new entrants, taking into consideration local tendering costs that are comparatively high by International standards.
- Regulatory and legal restrictions: International organisations have been encouraged to enter the local market via Government relaxation of regulatory and legal restrictions, particularly in relation to bespoke local standards and stipulated minimum local content requirements. In addition, the packaging methodologies employed by Governments in procuring most major projects has offered the prospect of multiple opportunities for businesses to secure work that fits within balance sheet constraints.
But why have Spanish contractors in particular made their presence felt in Australia?
The answer lies with Spain’s economic circumstances during the global recession triggered by the 2007-2008 Financial crisis. In the prior decade Spain flourished, with economic growth much faster than the rest of Europe and high levels of employment.
Spain’s associated construction boom abruptly reversed when a credit crunch hit, borne of a collapse in real estate prices. Local banks were left with huge losses as owners struggled to repay mortgages. Spain’s economic troubles culminated in 2012 with an application for a rescue package from the European Stability Mechanism (ESM) – the Eurozone’s provider of financial assistance programmes for member States in financial difficulty.
The crisis was devastating for the Spanish economy, with a protracted downturn resulting in a severe increase in unemployment. Accordingly, major Spanish engineering & construction contractors – particularly those with significant International operations – finding themselves with significant local idle capacity, turned their attention overseas for opportunities.
In the case of Spanish company ACS, market entry into Australia was via buy-in and then progressive takeover of German constructor Hochtief which had a controlling interest in Leightons Holdings (comprising Leightons Contractors, Thiess and John Holland). Spanish company Ferrovial acquired Broadspectrum in 2016 as an entry strategy. Acciona consolidated their initial contract positions in Qld, NSW and Adelaide with the acquition of Geotech Group in 2017.
Will the major International contractors remain invested in Australia?
In short, this depends on the relative strength of the pipeline of new infrastructure projects on offer in Australia.
Public Infrastructure is heavily influenced by electoral cycles in addition to being exposed to general economic circumstances. Major project announcements are a typical part of election campaigns and a significant proportion of countries around the Globe have major transport infrastructure programmes in train.
Public sector investment (ie fiscal stimulus) is also increasingly utilised by Governments to counteract slow-down conditions. Accordingly, and to counteract the considerable damage to global economic conditions borne of COVID-19, many countries are widely expected to implement infrastructure expenditure programmes to stimulate struggling local economies.
To illustrate with a brief snapshot around the globe:
- Spain: The recently elected Government is expected to moderately increase public construction and civil engineering investment, albeit off a historically small base. Uncertainties remain regarding political stability and the ongoing effect of deficit reduction measures negotiated in 2012.
- United Kingdom: The December 2019 snap election and subsequent confirmation of Britain’s exit process from the European Union (Brexit) has delayed confirmation of the timeframe for major public infrastructure projects, in particular the Northern Powerhouse Rail upgrade program which interfaces with the in-progress London – Birmingham HS-2 High Speed Rail project
- Asia: The Rapid Transit System (RTS) Singapore-Malaysia Link project remains on hold as the recently appointed Malaysian Government completes a review of the local construction sector. Notwithstanding, Singapore’s investment in infrastructure and civil engineering works remains relatively high, with several megaprojects currently underway or in the pipeline including the Thomson-East Coast MRT Line, the new Tuas Mega Port and Changi Airport Terminal 5.
- USA: The current presidential Election features significant US wide Infrastructure investment initiatives. However, the 2016 commitment to an investment programme which was subsequently blocked by Congress indecision has dampened expectations for boosts to major projects such as the California High Speed Railway, which continues to inch forward with escalating overall costs.
- Middle East: A major focus is on the Qatari economy which is anticipated to strengthen with increased infrastructure and construction activities associated with the 2022 FIFA World Cup.
Comparatively, Australia’s mega projects on offer including ARTC’s Inland Rail programme, Sydney Metro in NSW (Sydney Metro West and Badgerys Creek), Sydney’s Western Harbour Tunnel & Northern Beaches Link and Victoria’s Melbourne Airport Rail Link – appear attractive by International standards.
Of note however:
- CCCI as owners of John Holland have recently shelved their Singapore-based South-East Asian expansion plans to re-focus on their loss-making Australian operations;
- Italy’s WeBuild’s efforts to carve out a presence in Australia have generated mixed results with Bouygues, Samsung and Rizzani having had similar experiences; and
- Ferrovial has recently divested ownership of Broadspectrum to Ventia (a subsidiary of CIMIC and ultimately ACS) and has apparently signalled an intent to exit Australia.
I’ll explore the implications for local competition in a later article.