Gaining ground - EYfile/... · 2015-11-19 · all major Spanish contractors, including ACS, Acciona, Isolux, OHL, Ferrovial, Sacyr and FCC. Foreign representatives came from a.o

13th Construction, Infrastructure & Engineering Round Table

Gaining groundWill revival in infrastructure spending accelerate recovery to the construction and engineering Industry?

Contents

4 Introduction

5 Impressions of Madrid

6 Opening comments: José Luis Perelli and Julián Núñez

7 The role of the Ministry of Public Works in the future development of the construction sector and it’s internationalization: Ana Pastor

8 Second opening: Ad Buisman

10 The outlook for the Spanish construction industry: Julián Núñez

11 Analyst’s view on the sector: Teun Teeuwisse

12 Thefinancingofinfrastructure: Francisco Clemente

13 Panel: overseas investment opportunities for European construction companies

14 Panel: why contract management matters

15 Macroeconomic view and the Spanish economy: Álvaro Nadal

16 Closing

EY 13th annual European Construction, Engineering and Infrastructure Round Table

Ana Pastor (standing), Spanish Minister of Public Works, and seated: José Luis Perelli (to the left), President of EY Spain and Julián Núñez, chairman of the Spanish Construction Federation (to the right)

33

01Introduction

IstheEuropeanconstructionmarketreachingfirmerground--and is infrastructure the cement holding the recovery together? This was one of the key questions asked at EY’s 2014 Construction, Engineering and Infrastructure Round Table, held on 6-7 November 2014.

The Round Table was held in the focus point of the European construction industry: Madrid, Spain. With many Spanish construction companies topping the League Tables of the construction industry, one could say that Spain is the birthplace of today’s European construction, engineering and infrastructure sector. Spanish companies are at the forefront in infrastructure for air transport, high-speed rail, motorways, and bridges, participating in the most important projects around the world.

Nearly 100 construction industry professionals attended the event in Madrid. Among the keynote speakers were Ana Pastor, the Spanish Minister of Public Works, Álvaro Nadal, Secretary of State and Head of the Economic Bureau of the Spanish Prime Minister and Julián Núñez, chairman of the Spanish Construction Federation (SEOPAN). The event was attended by all major Spanish contractors, including ACS, Acciona, Isolux, OHL, Ferrovial, Sacyr and FCC. Foreign representatives came froma.o.Movares,Brookfield,JMandMarsh.

Participants agreed that investing in infrastructure can boost both economies and assist construction companies in turning back to growth.

“ The positive trend noted in Stockholm last year seems to continue, but there are still risks threat-ening the global and European economy”Ad Buisman Global Construction and Engineering Leader of EY

4 | EY 13th Construction, Infrastructure & Engineering Round Table

02 Impressions of Madrid

According to participants, high-speed railway links are considered critical infrastructure. Over the last 25 years, Spain has made a massive effort to develop a modern standard-gauge railway network. During this period, the country has gone from having no high-speed lines at all to boasting Europe’s largest high-speed rail network. On 6 November, the participants observed how Administrador de Infraestructuras Ferroviarias (ADIF), which manages most of Spain’s railway infrastructure, controls the 2,800 kilometers of high speed railway link under its purview. The participants learned that theMadridtrafficmanagementsystemisdesignedtoallowcontrol through re-planning, building up integrated systems for strategic and tactical real time planning, which allows the automation of repetitive tasks like telecontrol installations.

Also on 6 November, participants took part in a tour of the Real Madrid stadium, where they were shown what will be the Santiago Bernabéu Stadium of the future. The design includes the construction of a spectacular outer skin which will surround the stadium, and which will come alive through an LED system, allowing the Bernabéu to communicate with its surroundings. The eastern façade will feature a giant screen that will be used on special occasions to show the matches outside the stadium. The stadium will be equipped with the latest technology and the most current information and communication systems, and has been constructed to take into account the sustainable use of energy. The plan includes the construction of retail, leisure and restaurant zones, a hotel and underground parking. The retractable roof will allow the stadium to be used for various sporting events. Moreover, the nature of the design will allow its construction to be carried out without interrupting the normal sporting calendar. The estimated US$472m (€400m) revamp will be led by German architecturalfirmGMPalongwithinternationalfirmL-35andCatalanfirmRibas&Ribas,followinganinternationaltenderprocess.

Trafficcontrolroom,Atocha(Madrid)

Scale model of new Bernabéu

5 13th Construction, Infrastructure & Engineering Round Table EY |

03 Opening comments: José Luis Perelli and Julián Núñez

On Friday 7 November, the event was opened by José Luis Perelli, President of EY Spain, and Julián Núñez, Chairman of the Spanish Construction Federation (SEOPAN). Both of them stressed the importance of the new public investments in construction and infrastructure to the recovery of the Spanish economy, which has now shown growth in four consecutive quarters. Investment is not limited to the public sector. Spain is currently among the top European countries witnessing an influxofforeigninvestments.Forexample,oftheUS$10b(€8b) that had been invested in the Spanish real estate sector through30September2014,asignificantpartcamefromforeign investors. The country, for many years a no-go zone for foreign investors, is now at the top of the list for private-equity firms,hedgefundsandsovereignwealthfundshuntingforassets providing a return in Europe.

José Luis PerelliPresident of EY Spain

Julián NúñezMinister of Public Works of Spain


04 The role of the Ministry of Public Works in the future development of the construction sector and its internationalization: Ana Pastor

AnaPastor,theSpanishMinisterofPublicWorkswasthefirstkeynote speaker. She explained that Spain will transfer to private investors a total of 49% of the airport operator AENA, maintaining a ownership majority of 51% in what would be one of Europe’s largest initial public offerings so far this year. AENA is one of the world’s largest airport operators, and the IPO is an example of austerity measures helping a Spanish company to regain competitiveness.

The Minister of Development referred to the airport network to emphasize that it currently has the best level of accuracy of the last decade. Ms. Pastor remarked, “The tourists who visit our country enjoy first class infrastructure in Spain’s airports, which is important to consider as these facilities are the first thing one sees when entering the country.”

Ana PastorMinister of Public Works of Spain

The minister reported on two key questions:

• What is the role of the construction sector in globalization; and

• What actions should be taken to further stimulate globalization of the Spanish construction Industry?

Throughfinancialandtechnologicalinnovations,Spanishcompanies lead the international market in the development ofinfrastructureconcessions.Inthefieldofinfrastructure,Spain’s dynamic corporations, with their advanced technology, makeSpainaworldleader.Spanishfirmsenjoyahighlevelof international prestige, bringing their pioneering know-how to many major projects spanning the globe. The minister said that of the world’s 15 largest concessions, six are managed bySpanishcompanies,whichalsomanage30%oftheglobalinfrastructure, demonstrating one of the strengths of the Spanish economy. The construction and infrastructure sector plays a vital role in globalization. The sector is also an example of excellent management and planning, and with 16% of GDP, is one of the engines driving the Spanish economy. For that reason particularly, the 2015 government budget of Spain includesnewinvestmentininfrastructureforthefirsttimeinmany years. Examples of this include further investments in railwaysandports,suchasasignificantinvestmentintheportof Barcelona which has witnessed a 6% increase in cargo this year. However, new funding models -- primarily public-private partnerships (PPPs) have to be found to complete the nation’s infrastructure projects.


05 Second opening: Ad Buisman

Capital requirement 2014 Capital requirement 2013

Direct investment in infrastructure

49% (+/-SA) 49% (+/-SA)

Infrastructure funds (non listed)

39%(+/-SA)(ifcertaincriteriaare met)

49% (+/-SA)

Project bonds Same as corporate bonds Same as securitizations

Non rated infrastructure loans

Same as corporate bonds Same as corporate bonds

Ad Buisman, Global Construction and Engineering Leader of EY, explained that according to Eurostat, small increases can be noted in the output of European construction in the 12 monthsending30September2014.Prospectsforthesectorare slightly positive. Euroconstruct expects investments in construction to grow on average by 1.8 percent a year in 2014 through 2016, possibly indicating a turning point for the sector.

There are also risks. The International Monetary Fund (IMF) echoes an increasing fear among global policymakers that Europe is not on track to spur economic growth. IMF also warned of rising geopolitical risks due to the Ebola crisis and unrest in the Ukraine, Middle East, and parts of Asia, as well as financialrisks,ascentralbanksintheUSandUKpreparetoexittheir money-printing regimes while Europe and Japan continue their stimulus programs. The IMF has downgraded its forecast in growth of the world economy for four consecutive times.

With regard to investing in infrastructure, Ad hammered on the still unfavorable treatment of investments in infrastructure by insurance companies, as shown below:

Ad Buisman Global Construction and Engineering Leader of EY


Ad also demonstrated the issues the industry is currently facing, summarized in the table below:

Key issues for Construction companies in 2008 – no particular order

Key issues for Construction companies in 2014 – no particular order

1 Appropriatecashflow/workingcapital forecasting processes 1 Unprofitable‘old’contractswonatlow

margins still being worked through

2 Properfinancial/operationalriskmanagement systems 2 Lack of robust contract manage-

ment and control processes

3 Maximization of entitlements 3 Properfinancial/operation-al risk management systems

4 Choosing working partners carefully (suppliers and customers) 4 Effective governance

5 Effective governance 5 War for talent

6 Worldclassfinancialreporting 6 Supply chain management

7 Staff and corporate memory retention 7 Priceinflation

8 Diversification 8 Costoftechnology&innovation

9 Ensuring key business arrangements are water-tight up front 9 Bidding competitiveness

10 Managing funding risks and exposures 10 Threat of takeover/industry consolidation


06 The outlook for the Spanish construction industry: Julián Núñez

According to Julián Núñez, Chairman of SEOPAN, Spain should double its investments in infrastructure to continue to encourage the continued expansion of the Spanish economy. He underscored the importance of attracting international investors, especially relating to the development of water infrastructure,asthereisasignificantwaterlifecycledeficitin Spain.

Infrastructure is one of the top selling export products of Spain with a record contracted value in 2014 alone of US$50b (€42b) and a total order book of ten times that amount. Mr. Núñez also demonstrated that trillions of dollars in investments need to be made in global infrastructure, the bulk of it (51%) being required in Asia.

Mr.Núñezemphasizedtheimportanceofnewfinancingmodelsin order for European construction companies to compete with KoreanandChineseconstructioncompanieswhoarebackedby state funding programs. He pleaded for the European InvestmentBanktoincreaseitsfinancingofinfrastructurefromUS$10b(€8b)currentlyto$US36b(€31b),asfinancingremains one of the big problems for the industry.

Julián Núñez President of SEOPAN


07 Analyst’s view on the sector: Teun Teeuwisse

This year the analyst’s view on the sector, provided by Teun TeeuwisseofvanKempen&Co,emphasizedcashflowmanagement and transparency in reporting.

Mr. Teeuwisse explained that he uses GDP forecasts, but more importantly relies on PMI (Purchasing Managers Index) for current trends. PMI data is released on a monthly basis without atimelag,whileGDPhasasignificanttimelag.

Mr. Teeuwisse also mentioned that the sector is notorious forpostingbadnews.Profitwarningsareamorecommonphenomenon in the construction sector than in any other sector.

Teun TeeuwissevanKempen&Co

Project losses/cost overruns have a wide range of causes, including:

• Too aggressive pricing

• Weak project management

• Accepting increasing risks

• Design mistakes

The companies exemplifying these pitfalls are endless:

• Airport Berlin

• Benidorm tower

• NATO HQ

• Tunnels, highways etc.

Mr. Teeuwisse concluded that the sector faces many issues:

• The construction sector still deals with overcapacity

• Government spending remains under pressure

• Instead of adjusting capacity to demand, the sector is aimed tofillcapacityatanyprice

• The construction market suffers from irresponsibly low pricing

• Constructioncompaniesincreasinglyacceptrisk,specificallyrisk that is not in control of the construction company, leading topricingdifficulties

• Project controls and risk management are below par

• There is a question about incentives

• Projectcashflowdynamicschangeasprepaymentsarecoming down

• While construction companies continue to suffer for a few more years from today’s low pricing, subcontractors may increasepricingovernightwhichfurtherlowersprofitabilityfor the contractor


08 The financing of infrastructure: Francisco Clemente

Like Ana Pastor, Francisco Clemente, CFO of Cintra (Ferrovial), madeitclearthatfinancingisstillanissueforthesector.Comparedtopre-financialcrisisnumbers,marginsoninfrastructureloanswentupfrom100basispointsto300to400 basis points and maturity offered is down from 10 to 15 yearsto5years.Thereisalsoahugerefinancingwall,andunderwriting capacity simply disappeared. Today one needs aconsortiumofbankstofinanceinfrastructure.Newratioshave been developed and development risk is still hardly financeable.

Severalcountries,includingtheUSandtheUK,aretryingtodevelopnewfinancinginstrumentsbutwhatisreallyneededisan infrastructure bond market.

Francisco Clemente SánchezCFO of Cintra (Ferrovial)

Mr.Clementeendedhissessionbyprovidingtheflowingtake-aways to the audience:

• Learn from errors in the past

• There is much money but a lack of investable projects

• There are too many players

• Be afraid of another bubble


09 Panel: overseas investment opportunities for European construction companies

The next session was a panel discussion on overseas investment opportunities, moderated by Erin Roberts, the EY Americas Construction and Engineering Leader. Panel members comprised:

• Ignacio Botella, General Manager of OHL Construcción

• Mike Lucki, President of Lucki Advisors LLC and Retired CFO of CH2M Hill

• Jim Owen, Director in Houlihan Lokey’s Engineering &Construction/IndustrialServicespractice

• Juan Santamaría, Chief Executive OfficerofIridiumConcesiones

• José Antonio Labarra, General Director of Transport Concessions of Isolux Infrastructure

Moderator Erin Roberts kicked off the panel by explaining that the engineering and construction sector in the US is likely to be attractive for investors, as a revival in infrastructure spending in the US is likely to accelerate over the next decade.

Mr.Robertsspecificallymentionedinvestmentopportunitiesinsocial infrastructure, in the US’s 18,000 decaying bridges and obsolete roads and in the oil and gas Industry.

Mike Lucki explained that there is relative ease of doing business in the US, but the challenges should not be underestimated. He added that although the industry is easy to enter, it requires a bit more to win and execute on infrastructure projects. Only 28 states have decent PPP legislation. Mr. Lucki stated that the US is a US$950b (€806b) market, US$600 (€510)ofwhichisinfrastructureandUS$350(€300)inhousing. Many Spanish companies are active in the US: ACS, for example, is continuously looking for new acquisitions.

José Antonio, whose company Isolux is very active in constructing and operating power transmission lines in the US, stated that in the US it is all about having the right credentials. If you do not have them, you need a partner who does. With the right credentials, European companies can successfully leverage their engineering and construction capabilities in the US.

In consideration of the above, entering the US market through acquisitions is easier than trying to win projects from abroad. US construction companies are expensive, however, with construction acquisition multiples being approximately 11 to 13timesnetprofits.Transportationistheexceptiontothis,asmultiples are lower and therefore offer more opportunities.

JuanSantamaríaexplainedthatinfinancingUSinfrastructure,performance bonds are an attractive solution; however a lot of capital is necessary to successfully issue these bonds.

One of the issues of doing business in the US is the high cost of litigation. Mr. Santamaría mentioned, however, that as everybody is so much aware of this issue, disputes are settled well in advance of court procedures.

Panel members during the session


10 Panel: why contract management matters

Mr. Buisman introduced the topic by stating that deciding who is best suited to conduct the various parts of the work mustbeartheresponsibilitybothfinanciallyandlogistically,and negotiating appropriate contract terms and conditions are very important elements of the project strategy. Contract life cycle management is the process of systematically andefficientlymanagingcontractcreation,executionandanalysisformaximizingoperationalandfinancialperformance and minimizing risk.1 Adherence to a standard form is very important and one backed up by an enforceable arbitrationprovisionwithoneofseveralfirms,suchastheInternational Federation of Consulting Engineers (FIDIC), the New Engineering Contract (NEC) or even the Joint Contracts Tribunal (JCT).

Allpanelmembersconfirmedtheimportanceofsoundcontract management. José Manuel Loureda even stated that contract management is relatively new in Spain, Unlike foreign businesses, where project risks are usually adequately managed through solid contracts, in Spain doing business is based more on relationships than contracts.

Antonio de Santiago emphasized that in the case of concessions it is also about alignment of multiple contracts, e.g.financing,shareholders,operations,andconstruction.

All agreed that involvement of specialized lawyers is crucial and that involvement of a tender board is best practice. All also agreed that the percentage of unanticipated project failure/ lossesduetoinappropriatecontractsishighbutitisdifficulttoprovide a precise estimate.

1 Contract management guide, CIPS

Panel members during the session

The panel on contract management was moderated by Ad Buisman, Global Construction and Engineering Leader of EY

Panel member included:

• Guillermo López-Cediel, LATAM Business Development Director of Acciona Infraestructures Division

• José Manuel Loureda, Director of International Expansion of Sacyr

• Antonio de Santiago,ChiefExecutiveOfficerofFCCConcessions


11 Macroeconomic view and the Spanish economy: Álvaro Nadal

Álvaro NadalSecretary of State, Head of the Economic Bureau of the Spanish Prime Minister

Through Álvaro Nadal, Secretary of State, Head of the Economic Bureau of the Spanish Prime Minister, we obtained insight into the revival of the Spanish economy and the very significantstructuralreformswhichweremade.Mr.Nadal,likeAna Pastor, emphasized the importance of the construction and engineering sector to the Spanish economy. He explained the government’s economic objectives as follows:

• value for money

• being competitive

• sound balance between imports and exports

He stated, “If you cannot devaluate your currency, you need to compete on price and quality. As Spain lost its competiveness, therefore an internal devaluation was needed by lowering the cost of labor.” Therefor structural reforms need to be carried out and the government should stimulate sectors, such as construction and engineering, which are capable to grow. In this respect he emphasized that exports have grown substantiallyto34percentofGDP(upfrom11%)andtheindustry has been a major contributor to this achievement.

The main remaining challenge for Spain is job creation. The EIB is beginning to move but Europe needs more help from Mario Draghi.


12 Closing

In closing the two days of discussion, Ad Buisman noted:

a) The role of the government in growing the industry is vital. Spain in that respect is living by example;

b) Spanish construction companies have demonstrated how European contractors could send overseas their leverage on technology and innovation;

c) Cash is king. Construction companies should monitortheircashflowsandbefullytransparentinreporting thereon;

d) Financing of infrastructure is still a major problem. The European Union could do a better job in that respect;

e) For construction companies, contract management is absolutely key and should be an integrated part of risk management.



Notes


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Gaining ground - EYfile/... · 2015-11-19 · all major Spanish contractors, including ACS, Acciona, Isolux, OHL, Ferrovial, Sacyr and FCC. Foreign representatives came from a.o