Confidence around the construction market is not in a great place.
For the New Zealand construction sector, the industry's fortunes and confidence rises and falls on what is in the pipeline. If the industry, which employs around 240,000 and contributes close to $17 billion annually to GDP, knows what projects are coming onstream over the next five to seven years at least, it can hire on that basis, invest in plant, create systems and innovate. It gives the industry its momentum and direction.
And with question marks over the projects coming through in the longer term, in the horizontal or infrastructure segment of the construction industry (road, rail, pipelines), confidence around the New Zealand construction market is not in a great place. A July business confidence report from ANZ showed 33 per cent of firms were intending to cut jobs and a net 38 per cent were expecting deteriorating profits.
Challenges and solutions
As a Labour-led coalition Government prioritises public transport, light rail and safety on roads, putting off any new state highways, infrastructure favoured by the former National Government, there has inevitably been a pause on the projects slated to come through in the next five to 10 years.
Many players in the infrastructure construction industry are pinning their hopes on the imminent New Zealand Infrastructure Commission, set to launch in October, whose presence might take out the political flip flops of infrastructure plans as government changes occur and help give the industry some certainty of what is ahead.
"We believe it's really important that it's a non-political body — what they will do is make recommendations and the Government will respond," says Peter Silcock, chief executive of Civil Contractors New Zealand (CCNZ).
"It would be great to see a bilateral approach where we all agree that this investment is required," he adds.
Louise Adams, Aurecon managing director in New Zealand and Australia, says the stop and start cycles on infrastructure spending due to political party changes is a challenge for democracies the world over.
Bodies like the new Infrastructure Commission will really be trying to cut through this, she says.
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"They will be saying: "Let's take the partisan debate off the table — what are the needs of the community, what is the population growth, the prior infrastructure, all without political overlay, to ensure those entities are given a voice."
Many infrastructure projects are going to span well over the political cycle, adds Adams.
Having a body like the Infrastructure Commission will help New Zealand determine what skills are critical to help develop the infrastructure of the New Zealand economy, to improve delivery of infrastructure, says Adams. She warns that Australia already has skills shortages in the infrastructure field.
Beca's group director of transport and infrastructure, Damian Pedreschi, is another who is hopeful about the Infrastructure Commission in light of the industry's current holding pattern.
The importance of getting bipartisan agreement around infrastructure, from hospitals to commercial innovation, is vital, he says. Then it is a case of getting behind the best project. That industry meets the market at a fair price. A company consortium can do a great job for the public and everyone is happy.
Current infrastructure projects
To anyone driving around Auckland, the Waikato or Manawatu, they would think the infrastructure sector was doing very nicely.
The Treasury puts out a quarterly view of infrastructure projects in the pipeline, but according to those in the industry there is an undoubted lag between what was on the slate with the National Government and what is now a priority with the coalition Government.
Downer New Zealand chief executive Steve Killeen says the company is involved in both small-scale community projects and some of New Zealand's landmark projects.
"It is actually a very exciting time to be involved in New Zealand's infrastructure," he says.
One reality all construction companies are having to face is the decline in South Island work as earthquake recovery and roads of national significance work comes to an end, he says.
Avoiding the boom and bust cycles of infrastructure construction is critical for creating a sustainable industry, he says.
"We need to collectively maintain investment in growing the right capability and skill sets to enable this country to flourish and this can only be done with the surety of forward work."
Rail networks are meanwhile getting some much-needed investment from the Government. Kiwirail received $1 billion in the Budget, which it sucked up pretty quickly. The Provincial Growth Fund (PGF) will provide $300 million of this $1b; $375m will go on new wagons and locomotives and more than $330m on track and infrastructure.
The PGF is providing support on a number of infrastructure projects including the Rotorua development of the waterfront, according to Peter Silcock.
Infrastructure projects on water quality will be a big part of the pipeline going forward, predicts the chief executive of CCNZ.
A big Watercare project in Auckland is due to start this month — the contract is to build a $1.2b wastewater tunnel, known as the Central Interceptor, and other infrastructure from Western Springs to the Mangere Wastewater Treatment plant.
There are likely to be other similar projects around the country, he predicts.
Meanwhile some key road projects throughout the country are still being finished off, for instance the Puhoi to Warkworth motorway, he adds. He thinks there are probably in total about eight to 10 big roading projects starting and due to finish, such as Transmission Gully in Wellington and the Waikato Expressway.
Silcock points out the pipeline problem as those ongoing jobs are due to finish in the next couple of years.
"In this industry, everyone knows if there is not a project that is well underway on planning consent approvals now, then it won't be started in the next two years. A big infrastructure project can easily take five years in the planning process before starting," he says.
As a result, in a recent CCNZ survey, contractors said they were still looking to recruit people but fewer people than a year ago.
Contractors are looking for a stronger pipeline of work preferably five years hence and then they can plan and back themselves, says Silcock.
And with the national election next year there is a lurking fear, he says. "What happens if National are elected? Are we going to go back to their plans? Because of the long gestation of infrastructure projects, if we are flip flopping, it makes it very challenging to get projects under way."
While those in the infrastructure field are in a waiting pattern, Beca would just like to see a good decision whatever colour the party is, says Pedreschi.
The difference in the two main parties, Labour and National, shows particularly strongly in transport infrastructure plans, he says.
While the construction industry servicing the country's infrastructure waits anxiously for more direction from the Government and regional and local decision makers, a number of contractors and advisers in the commercial construction, or vertical sector, as its known, say they are busy and have a pipeline of work at least through next year.
Pipeline is also important for commercial construction as it is for infrastructure, says Beca's group director of building, Mark Spencer.
The signals are mixed in the vertical construction sector. But in the commercial construction sector, Stats New Zealand reported in June that non-residential building consents were up $7.4b, an increase of 7.9 per cent on the June 2018 year, although commercial construction intentions plunged 25 points in the ANZ Business Confidence survey in July.
Those busy with work right now are seeing their book of business coming from universities and district health boards among others.
There is also a lot of need coming out of Wellington to upgrade and start again with buildings.
Christchurch still has a way to go for the rebuild of its city centre and new development is seeing parts of the city becoming industrial or business hubs.
Naylor Love chief executive Rick Herd, whose 110-year-old company is working on around $650m of developments for this year and beyond, says the firm is working on large city and regional projects all around the country including the Spark Building in the Square in Christchurch, the Christchurch Cathedral reinstatement, the old Wellington Town Hall and the Dunedin Hospital rebuild.
Downer, which bought Hawkins in 2017, has a significant pipeline of work over the next 24 months, particularly in growth regions like Tauranga and Auckland, says Steve Killeen.
As well as ensuring they have a steady flow of work, the heads of these big construction firms are also fighting a battle to raise the standards in their industry after a handful of big company failures in the past few years.
"For far too long a lowest-price focus has eroded both quality and expertise within construction services. This has to be addressed throughout all layers of the sector and a reboot is needed with an emphasis on quality delivery, risk managed by the most appropriate party and an investment into the communities we work in," says Killeen.
Herd, who takes pride in having half the turnover of staff that is the norm in the construction industry, is still seeing bad behaviour in the industry and picks out Christchurch as a city still too driven by the bottom line.
"We recently lost a job in Christchurch to a competitor that - by our estimate and comparison of two other competitors' prices - was below cost. You have got to hold the line on margins. Too many people are running on cash flow rather than balance sheet. If there is a downturn next year or two, I am very concerned that more people will be laid off in our industry."
Herd says the failures by companies like Mainzeal, Ebert and Arrow International are a clear indication of poor construction management and an unhealthy industry which encouraged poor margins, high levels of fragmentation and boom and bust cycles.
Master Builders Association chief executive David Kelly, who cites work going on at Dunedin Hospital, Auckland Airport and Middlemore Hospital, as well as local government buildings, as a good sign for the industry. But he agrees with Herd that the industry is still not where it needs to be.
Kelly says a lot more contracting out over the past few years has led to fragmentation and businesses coming into the industry without a lot of assets or a management team. Because these companies don't have a lot to lose, as they don't have a lot of assets, they will bid low on projects.
But lessons have been learned, Kelly maintains. "The healthy thing happening now is a lot of larger and medium-size contractors are more alert and are pushing back, looking harder at the margins they are charging because they know otherwise they won't survive.
"It's been a big wake up call for the construction industry."
Understanding risk and managing risk is the most fundamental requirement of running a construction business, says Kelly.
Master Builders is running workshops to help contractors understand some key elements of this.
Kelly advocates transparency around price and discussions with the client explaining what the risks are in relation to the price.
"If, as a client, you don't understand, then you are beholden to advisers," he warns.
To their credit a lot of government agencies are changing the way they think about considering bids, says Kelly.
A client can end up paying a lot more than they would in the first place if they go for the lowest price bid and then the company fails. Then they need to find another firm to do the job and at a substantially higher cost so it may not be a prudent use of public money, he argues.
According to Louise Adams, a big part of the failure in larger construction companies in both New Zealand and Australia has been a lack of skills and capability.
Commercial projects have become a lot larger and more complex, she says. Running a development is like running a mini-business these days, she says.
You need the best leaders to manage the tech and construction of these projects, she says.
Beca's Mark Spencer says he still sees unsavoury behaviour on both client and contractor sides.
"I think what we are seeing is a reticence of people to participate in projects with unfavourable terms but we are still seeing non-standard terms being presented where it's about risk transfer rather than risk allocation," he says.
Construction company failures are happening not just in New Zealand but Australia as well, adds Spencer.
Beca suffered direct losses when an Australian contractor, which had been going for over a century, went into liquidation in Australia.
The company was substantial, probably turning over $1b, and Beca did its due diligence, but the firm took on two or three low-margin bits of business, then had some problems on the projects and that was enough to bring it to its knees.
What's on the horizon?
As the sharemarkets had a case of nerves last week, Naylor Love's Herd watched carefully. He says New Zealand is more affected by overseas influences than Australia with its bigger local market.
"Our biggest concern is a major geo-political issue like the '89 stock market crash or the 2008 GFC — those things are a worry. If you look around the world, there is a good chance of a downturn two or three years away," says Herd.
Naylor Love is looking for the Government to put more money into education and hospitals to support the vertical/commercial sector which it is indicating it will do, he adds.
There needs to be an elevation of the conversation, says Damian Pedreschi from Beca.
"What we build now is enabling how a city is shaped.
"We have to be incredibly mindful about what we design now, there is no doubt that climate change will play a much bigger part in how Auckland and Wellington are built," he says. This will require some Investment in making cities sustainable.
"For the people in our younger ranks, that is what they are most passionate about. They really believe this is mission critical today."
Pedreschi stresses there is a good element of optimism in the infrastructure world.
New Zealand is in a good place, it will be a fantastic place to live. But there is an urgency to decide what is needed and to invest in the right infrastructure for the future, he says.
Aurecon's Louise Adams would like to see improved digitisation in the construction industry.
The construction industry is one of the only industries in the world where productivity has declined over the turn of the century.
"The digitisation of infrastructure into design and maintenance, the whole life infrastructure that can help us construct but get more out of life, that's why we need to look outside of traditional skillsets to reach out to disruptive businesses," she says.
Civil Contractors New Zealand's Peter Silcock is concerned about the deal the regions are getting.
"From a civil construction point of view, Auckland very busy but I am concerned with what is happening in the regions once state highway improvement projects are finished."
Master Builders' David Kelly flags the Constructive NZ construction forum coming up on September 12 which will be a whole industry meeting.
Last year's topic was, "What's going wrong?" This year's is more, "Okay, what's happened and are we making progress?" Kelly says there needs to be a broader, more rounder understanding of how construction works.
Kelly was talking to a civil contractor, and they agreed the various sectors within construction were not working together as an industry.
"Instead of jealously guarding IP, we can share that and grow," says Kelly.
A downturn is on the horizon, says Downer's Steve Killeen.
There is no doubting the need for both economic and social infrastructure and he would expect the Government to work with the sector to minimise the negative impact of boom and bust cycles within the limitations of funding and consistent with the policy settings in place.
Killeen has something else on his wish list.
"Personally, I would like to see the Minister for Construction having their own ministry [rather than under the Ministry of Business, Innovation and Employment, or MBIE] and hence the ability to have a more direct impact, but perhaps this is a slightly biased view."
Construction Sector Accord
The Construction Sector Accord was signed and launched in April 2019, its aim to make construction a high-performing sector with a better culture and behaviour to enable the industry to thrive.
Those involved in the Construction Accord are working hard to re-educate builders and client organisations on what a good tender bid looks like and how contractors can make their bids more transparent for clients so they understand what risk the contractor takes on if they put in a low bid.
Members include the Vertical Construction Leaders Group formed by Naylor Love chief Rick Herd and others.
Is the Construction Accord achieving something?
"The Labour Government is listening more than the National Government did, "says Herd.
"My view is it is up to industry as much as the Government to fix things. Construction companies shouldn't take on projects that they don't have the people to deliver, or don't understand the inherent risks and they shouldn't accept unsustainable margins," says Herd.
There is a lack of knowledge. One of the things the Construction Accord is trying to do is educate all the client organisations, the property owners, representatives of universities, health and education departments; trying to educate them on what a good sustainable contractor looks like. If they work on the lowest-price basis, these collapses will continue, he adds.
Transparency of the pipeline and an associated levelling of workload is essential to ensure the safety, productivity and social outcomes the accord is seeking to achieve, says Downer's Steve Killeen, who is leading the business performance priority work area under the accord with MBIE chief executive Carolyn Tremain and Michael Sentch from Project Unite.
He adds: "One of the things I am most excited about is the shifts we are seeing in procurement, both at government level and client level. Some clients are transitioning to active engagement and choosing to be leaders in strategy, safety and sustainability."
"I cannot over-emphasise the need for a reasonably level workload and client leadership in driving better commercial behaviour from the construction industry," he adds.
The Construction Accord is forming a transformation plan starting at the end of 2019.
Killeen says the transformation plan will work to address many of the long-term systemic issues that have been holding the sector back such as skills shortages across the industry, poor risk-management practices, unclear regulations, an uncertain pipeline of work and a lack of trust among parties in the sector.
Leadership is also an issue as there are more than 150 different industry groups so it's been difficult to get agreement and traction on change and these challenges contribute to low productivity and instability, Killeen says.
The plan will set out new initiatives for tackling these challenges and incorporate projects already under way in industry and the Government. It will be about driving the right behaviours among all players in the sector.
"The plan is still under development and we are talking with representatives from across the sector to make sure we incorporate their views and build support," says Killeen.
Consultation is under way with a survey this month. Stakeholder meetings will be held in Christchurch, Wellington and Auckland this month and next.