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As major urban areas strain to adequately support rapidly growing populations, the need for infrastructure is at an all-time high, a development so pivotal that it is pressuring the engineering and construction industry to step up as never before to meet the challenge, and putting their efficiency and risk management processes to the test, according to KPMG International’s Global Construction Survey 2012.
The Great Global Infrastructure Opportunity surveyed 161 engineering and construction companies around the world with revenues ranging from US$ 250 million to more than US$5 billion.
“With increased scale comes complexity as global industry players navigate a tough political, commercial, regulatory and governance environment which will test their risk management ability to the maximum extent,” said KPMG’s International Sector Leader, Engineering and Construction and a partner in the US firm Geno Armstrong.
Just over 40 per cent of respondents globally anticipate that the energy sector offers the greatest opportunity for revenue in the next 12 months. Second behind energy were roads/bridges tied with residential at 24 per cent, followed by rail and mining.
Nearly 60 per cent of respondents from the Americas believe the energy sector will have the biggest impact on revenues, followed by retail projects. Respondents from Asia Pacific and Europe, Middle East and Africa (EMEA) also see energy as their biggest revenue producers. In Asia, respondents see the second biggest revenue opportunity in the industrial sector, while in EMEA, roads/bridges ranked second.
“The demand for firms and individuals with sector-specific engineering and construction skills will rise as [power] projects proliferate around the globe,” said KPMG’s Global Head of Power and Utilities and a partner in the Hungarian firm Peter Kiss, who added, “This should prove to be a major source of income for the industry as a whole.”
While 49 per cent of respondents expect their backlogs will grow from 5 per cent to over 15 per cent in the next year, 71 per cent of respondents cite economic uncertainty as their biggest ongoing concern followed by a skills shortage (31 per cent) and thirdly, government deficits (30 per cent). Sixty-two per cent said that they expect margins on current bids to remain unchanged from their current backlog.
Fifty-seven per cent said their revenues in 2011 increased from 2010, with the Asia Pacific region seeing the greatest growth (72 per cent) followed by EMEA (53 per cent) and then, the Americas (41 per cent).
Creating efficiencies to manage complexity and meet demand
To mitigate risk, manage project complexity and effectively meet the anticipated increase in demand, companies are seeking solutions to address efficiencies in their procurement/supply chain. Nearly 60 per cent of respondents say improvement in this area will improve profits and enhance cash flows.
Almost 40 per cent of respondents say the primary cause of inefficiencies in their supply chains were disparate processes and systems.
Cost cutting still remains a challenge for companies as well, with organisational culture seen to be culprit for implementing the cuts for 61 per cent of respondents globally, and 78 per cent in the Americas. And a surprising 17 per cent of respondents globally said that cost reduction was not a priority at all.
Survey respondents acknowledge that IT optimisation is critical to improving efficiencies, yet 50 per cent say that overhauling IT systems takes too long and costs dearly. Others (30 per cent) say that there are not enough available ERP packages available that are tailored to the construction sector.
“IT investment doesn’t come cheap,” said Douglas Gates, Principle, KPMG US, Advisory practice. “Nevertheless those brave enough to fund major IT enhancements are now reaping the rewards of great centralisation and transparency across their supply chains.”
Risk management still a major concern
With projects anticipated to become more complex, maintaining margins and mitigating risk are major concerns for most respondents. Globally, 45 per cent of respondents say that quantifying risks is the chief concern; in the Americas, 52 per cent of respondents say that identifying risk is the main focus and nearly 50 per cent said they want to understand the link between strategy and risk.
“Despite considerable investment, risk management still comes up a bit short,” Armstrong said. “Our survey revealed that nearly 54 per cent of respondents said they failed to identify upfront issues that later caused margin erosion and only 36 per cent believe that their project review processes are very efficient.”
Barriers to nvestment
What respondents say may be the primary barriers to public-private partnerships in infrastructure investment is a perceived lack of policies, leadership and investment by the public sector as well as a lack of initiative in the private sector.
Less than half (47 per cent)of respondents believe government policies will have a positive impact on investment, which is roughly equal across all three regions, with Asia Pacific being the most positive (49 per cent) followed by EMEA (47 per cent) and the Americas (41 per cent).
Moreover, respondents showed concern about the public sector’s ability to drive infrastructure investment with 80 per cent of respondents globally saying that lack of leadership will hamper investment.
And while respondents globally anticipate that energy (34 per cent) followed by transportation (33 per cent) will likely attract the most private sector investment for their companies, two-thirds see a lack of private sector initiative as another barrier to investment. Fifty-six per cent of the America respondents see transportation as having the biggest appeal for investment.
“With austerity policies in many countries constraining the scope for public sector spending, it is vital to create an environment that encourages private sector investment,” Armstrong said.
Commenting further on infrastructure investment, KPMG Global Head of Infrastructure Nick Chism said, “As governments around the world seek to create 21st century infrastructure, they need to create an environment that encourages private sector investment. This means addressing regulatory and legislative barriers and showing the kind of long-term will that transcends immediate political popularity.”