Peter Reidy took up the reins at Fletcher Construction 10 months ago. He talks to Bill Bennett.
Peter Reidy has a good handle on the risks facing Fletcher Construction.
When he arrived at the company on October 29 last year, he found "a steely resolve to get it right".
Although there are still issues, the company's employees are motivated and executives have taken a measured disciplined approach to rebuilding the company. Best of all, he has been able to recruit some of the best talent in the industry.
During his first days at the helm, Reidy learnt that there was a huge amount of goodwill for the company among customers. He spoke to many and came away with a clear picture of how they view the business.
Above all, he says, they told him over and over that Fletchers is an important part of New Zealand's construction sector and that they want it to be a strong player.
The other message he got from the market was there was respect for Fletchers for not walking away from the construction business.
One key to success in the construction industry is prudent risk management — for Reidy that means managing a portfolio of risks.
The business is structured as a portfolio of specialist companies, each with its own focus.
Performance also depends on the market. Reidy says at the moment the South Island is quiet, after the Kaikoura earthquake. Auckland on the other hand is showing huge growth. There is pent up demand driven by rapid population growth.
"Like every modern city, it is looking to build infrastructure," says Reidy. "The Government is moving more towards urban development, more multimodal infrastructure rather than just roads. That's an opportunity for the sector.
"You've also got the private sector in Auckland: there's Auckland Airport with a large master plan. Watercare has a significant master plan. City Rail Link is developing and KiwiRail is now investing money in the Auckland network.
"There's also a big investment from Auckland Transport in local roads ... and large apartment growth."
Growth is also surging in regional New Zealand.
Reidy singles out Queenstown as an example. Then there is growth in national infrastructure — water, safe roads and airports. Reidy says this area is very strong.
But there has also been a change in the mix of projects.
"We've not seen the big investment in highways that we might have seen three years ago, but we have more investment elsewhere in making roads safer and in rail. There's more social infrastructure. The health sector has $10 to $15 billion to spend. Government will be a large procurer."
Reidy predicts investment in roads will come back. At some point they will erode and maintenance costs will rise to the point where the government will invest instead in new construction.
"The infrastructure sector has around $25 billion of work put in place and is growing strong. It hires 10 per cent of New Zealanders. It's about seven per cent of the country's GDP. Government is spending about $10 billion a year. It's a sector that really matters and contributes to New Zealand's productivity.
Recognising this, the Government has invested in the construction sector accord."
Fletcher's portfolio approach can pay off in another way. Reidy says the company's strategy is to use the portfolio approach more in the future as a way of providing customers with a fuller response to their needs.
The portfolio contains a number of familiar brands. Higgins is a civil engineering business that provides road maintenance services; Brian Perry Civil specialises in river and marine work. It handles foundations and ground engineering.
The Fletcher brand is used for projects in the South Pacific. It operates in seven countries with particular focuses on Fiji and PNG.
Fletcher Construction handles large commercial and infrastructure projects. It is currently building the Pūhoi to Warkworth motorway in a partnership with Acciona Concesiones SL — a Spanish company. It also has major projects on the Ōtaki highway and in Hamilton.
The loss-making business unit previously known as Building + Interiors (B+I) is now called Buildings — it handles vertical projects. After exiting the market for big building contracts following construction cost blowouts with Auckland's International Convention Centre among other projects, Fletchers has announced an intention to return to the vertical construction market.
Says Reidy: "When I started here the message I got was that Fletcher Construction has a strong portfolio of businesses. When we bring them together in an integrated manner, it's a powerful proposition for customers. That's our intent. They all have good positions in their markets and we're keen to grow them. Each is focused on its particular market".
Fletchers doesn't like to talk about the profit performance of individual business units, but Reidy says one advantage of the portfolio approach is that it brings balance.
One unit could be enjoying strong market conditions while another is not doing so well.
Reidy says that at the moment Higgins has a strong market share of the "safe roads" contracts coming out of the NZ Transport Agency (NZTA). "They're been very strong in the regions. We are the second largest bitumen provider in New Zealand.
"Brian Perry is doing all the piling work on the America's Cup Village. Fletcher Construction and Acciona have just had a record season on the Pūhoi to Warkworth project. They moved close to four million tonnes of dirt — a New Zealand record. Every business has its strengths and every business has its challenges. But that's the sector we operate in."
Fletcher has been through a tough period with major project cost escalations on some major construction projects.
Reidy says it's clear the company has had issues. But so have others in the sector." It is a sectoral issue.
The industry has had a lot of pain. There are stress points and a lot of people in the sector are struggling. A number of construction companies and builders have not survived, yet it is a growing sector, so what is going on?"
He says this is one reason why the Construction Sector Accord has been set up. It aims to provide a better procurement pipeline while pushing through reforms to improve industry performance, culture and reputation.
"The risk allocation model has completely changed in the last three or four years.
"We're seeing evidence of it being assessed and government has a desire to lead that and have fairer risk allocation. There has been a lack of trust in the industry. I'm seeing changes there. The construction accord is evidence of that."
Reidy says the company has learnt a lot from the past. It has put in place tendering and commercial disciplines for effective risk management and introduced rigorous measures for bidding and negotiation.
"Our plan for our vertical construction business will position us as a specialist project management-led business, with a confident design and construction offering.
"We will undertake projects where we can work positively and constructively with long-term New Zealand-based asset owners and operators in both the public and private sectors, and where there is appropriate risk sharing. We will be approaching the market in a measured and disciplined way."
From KiwiRail to Fletcher Construction
Peter Reidy spent four years managing change at KiwiRail before moving to head Fletcher Building's construction division at a time the business was struggling. The two organisations have much in common.
"Both have a large employee base of people who work in the field. A lot of the people are similar. They have a huge investment in getting things right. They have have a real focus on and pride in the brand."
Both companies are important to regional New Zealand — their brands have a strong presence there and they are important employers. And both have government as one of their biggest clients. Fletcher Construction may be privately owned, but the government portfolio makes it the largest customer.
Another commonality is that the two organisations help shape New Zealand's critical economic infrastructure.
Says Reidy: "KiwiRail was all about helping to get export growth. To get environmental emissions down, we needed KiwiRail to grow. For the forestry sector to grow, you needed KiwiRail to grow."
For Reidy some of the management issues are similar. "It's a leadership and cultural challenge. It means giving people hope and confidence. Today a lot more people think KiwiRail is a positive place to work."
While they have much in common, there are notable differences. Reidy says Fletchers doesn't have OIA (Official Information Act) requests. "KiwiRail has government as a shareholder, which means a different lens. They'll look more through an environmental, social-economic lens. At KiwiRail we helped change thinking around public transport policy. Here, Fletchers is helping the government think through how to shape the construction sector."
"KiwiRail was part of the fabric of government and investment in society that people see everyday, whether it is passenger trains, freight trains or ferries. Fletchers you are one of many construction companies."
Fletcher Construction has returned to profitability, its remaining B+I projects are stable and being delivered within provisions.
In the past year 10 projects were closed out — with six remaining.
The value of work to complete reduced from $1.4b in Feb 2018 to $0.4b now. Only Commercial Bay and NZICC will continue into calendar year 2020.
In June this year, it was announced to the market that Fletcher Construction would resume bidding in the New Zealand vertical construction market.
Key completion dates
• Hamilton Section of the Waikato Expressway — end 2020
• Peka Peka to Ōtaki — end 2020
• Pūhoi to Warkworth — end 2021.