What are the biggest challenges and opportunities facing the construction sector in your jurisdiction?
In the Flemish Region a political agreement has been reached (and is already partly formalized) to end the consumption of open space by 2040. The issue proved quite controversial in the media and with the public and was nicknamed the “betonstop” (literally: “cement concrete stop”). The exact details still have to be worked out. More focus on renovation projects and efficient use of already occupied space – less new buildings.
The evolution towards a circular economy is very, if not most tangible in the construction sector, as it is one of the primary targets where policy makers discern (rightly so) large potential. A more integrated approach to the life cycle of constructions is imposed and encouraged (EPC-certificates, Building Integration Modeling, demolition inventories,…). An ongoing issue is the (cost of) ever stricter energy efficiency requirements for (new as well as existing) buildings.
In the framework of public procurement regulations, recently, under influence of the European Directives, specific rules were introduced to combat unfair competition and social dumping.
Priority sectors for development in Oman include tourism, mining, logistics, downstream industrial projects and renewable energy. However, the construction and projects market is still dominated by state-owned entities and, as a consequence, the government’s drive for greater economic diversification remains tempered by its need to balance the budget deficit and modest hydrocarbon prices. The construction sector has also been subject to labour shortages and pricing pressures in what has traditionally been an employer-friendly market. Omanisation requirements can compound the pressure on construction companies if not managed carefully.
It is hoped that private finance initiatives (“PFIs”) will fill funding gaps for infrastructure development following the private sector’s successful participation in the power and water industries over the last 20 years. Other sectors look set to follow suit and PPP variants are already being utilised in the healthcare and tourism sectors. The development of Special Economic Zones will provide significant opportunities for private companies in the industrial and logistics sectors as the government seeks to leverage its favourable geographical position and market itself as a gateway to the wider GCC region.
Oman would also benefit from the establishment of a dedicated arbitration centre for the conduct of cost and time-efficient arbitration of construction disputes.
The construction costs in Denmark are among the highest in the world. This is due to high salaries for construction workers, high taxes and high costs for construction materials.
This combined with a big growth in the market and shortage of manpower is a challenge, as there is a tendency to bottleneck, thus increasing prices further. However, an increasing number of international contractors is entering the Danish construction market which mitigates the consequences of the bottleneck to some extent.
The Public Investment Fund is planning the construction of US$ 500 billion Neom City on 26,500 sq km of land on the Red Sea and Gulf of Aqaba coast. Another major project is the Al-Qiddiya entertainment and sports project on 334 sq km in the Riyadh region.
The big urban developments that are upcoming particularly in the city of Madrid (Operación Chamartín, the operation AENA is leading in the area of the airport of Madrid-Barajas, Los Carriles in the North of Madrid, etc.).
- Biggest Challenges:
(a) Land acquisition:
Although this issue has been improved with the enactment of various regulations to ease the land acquisition process, there are still practical challenges. Investors should be aware of the potentially lengthy and costly process of land acquisition. Landowners may either refuse/reluctant to sell their land or demand very high prices beyond the market price rate. It is possible for the land owners to file the lawsuit related to the disagreement of the proposed land prices. An example of this is the dispute between the landowners in the land acquisition of the Mass Rapid Transit (MRT) Jakarta project.
(b) Financing Gap:
One the biggest problems relating to the infrastructure development is to find the necessary funds required to meet the government’s target for infrastructure development.
In the National-Medium Term Development Plan (“RPJMN”) 2015-2019 the requirements for infrastructure financing reaches Rp4,796 trillion (or approximately USD 348 billion at the present exchange rate). The available financing from the APBN is only capable of covering Rp.1,978 trillion (USD142.5 billion) or 41.3% of the needs. While State and Regional-Government owned companies can only provide approximately Rp1,066 trillion (USD76.8 billion) or 22.2% of the needs. This leaves a financing gap in the infrastructure sector of Rp1,715 trillion (USD123.6 billion) or 36.5% of the needs to be supported by the private sector.
- Biggest Opportunities
Various Infrastructure Projects
The country’s present RPJMN 2015 – 2019 highlights infrastructure development for connectivity and accessibility, enhancing the maritime sector, integration of remote and frontier regions, shifting transport from road to rail and shipping, and tackling urban mobility. RPJMN 2015 – 2019 focuses on improved competitiveness through greater connectivity and productivity, and addressing inequality by prioritizing development in eastern Indonesia.
In accordance with RPJMN 2015 – 2019, the following governmental road strategies have been developed:
(i) creating an obstacle - free road transport parallel to the national arterial roads, with reference to the capacity and standards of freeways;
(ii) renewing and improving the national road network through an integrated road – capacity - building program, improved geometrics (alignments and widening) and repair; and
(iii) optimizing efficiency and improvement of administration/implementation in the road sector in regard to cost efficiency and quality of work.
In addition, several public finance institutions have been set up, such as the Indonesia Infrastructure Guarantee Fund (IIGF), PT. Sarana Multi Infrastruktur (SMI) and PT. Indonesia Infrastructure Finance (IIF). In 2015, the government announced that SMI would become the government’s infrastructure bank and it has started to transform into this role, offering debt and equity to infrastructure projects.
Mexico has important areas of opportunity on: (i) administration of contracts; (ii) growing and understanding of Construction Law by engineers and lawyers; (iii) Improving dispute resolution mechanisms being more effective and efficient. Our firm has been very active in promoting the improvement of this areas, through participation in different for a and organizations.
The last decades have seen a large infrastructure development in Colombia. The fourth road infrastructure still is a very important opportunity in the construction sector because projects are still being under structuring. The most important challenge in regards fourth generation is the financing of the projects, some of them have reached a dead end in this aspect and Colombian state must intervene so that this challenge can be surpassed.
The new tendency on the last years on PPP schemes are the social infrastructure PPPs such as the construction of jails, public schools, museums and hospitals. This is a broad new market for public procurement. As these projects are mostly financed with public funds, the most important challenge in this new development is the country’s fiscal framework.
The biggest challenges facing the construction sector in Switzerland for the moment is the implementation of the new Federal Act on land allocation with stricter conditions applicable to zoning plans and building in non-buildable areas, as well as an increasing pressure on prices in transboundary areas.
In the wake of the 2014 Lacrosse tower fire in Victoria, and the 2017 Grenfell Tower fire in London, the issue of non-compliant building products has been the focus of Australian federal and state government inquiry and recent legislation. Global supply chains have made greater regulation and quality testing necessary to ensure compliance with Australian standards.
The Australian resources boom, and in particular the mining investment boom, has come to an end with the completion of large resources projects. The most significant opportunities within the construction industry now arise from infrastructure projects, which have been driven by government asset recycling schemes where the proceeds of sales of government assets in turn fund further infrastructure. In particular, there is a major focus on road and rail projects to improve city transit times.
The biggest challenges facing the construction sector in Norway today are several. The most important are nevertheless to combat labour crime, improve communication flow in the projects, reduce the number of disputes, get small contractors to adapt to larger projects, and cooperation and competition with foreign contractors. The use of new types of contracts will be more prominent in the coming years, which can also pose challenges.
There are also big opportunities in the years to come. For example, several of the contracts entered into today are on a larger scale, which contributes, among other things, to increased security for workers and a high creation of value in society. Furthermore, we see that new types of contracts that allow for greater involvement of contractors, such as optimised solutions developed by the contractor, can open up for new opportunities.
In addition to this, and mainly as a result of the latter, there will be fewer disputes related to the design and planning in the design and build contracts, which is a positive development for the employer.
The construction costs in Sweden are among the highest in the world. This is due to high salaries for construction workers, high taxes and high costs for construction material. At the same time, the quality requirements under Swedish building regulations are among the highest in the world. Sweden has seen a great population growth and urbanisation in recent years and there is a severe shortage of housing, especially in the larger cities. To build affordable housing is a great challenge and will continue to be so for many years.
Despite being a highly developed economy, there still are an unacceptable number of deaths and injuries in the construction industry in Hong Kong. During the construction of the Hong Kong-Zhuhai-Macau Bridge, for example, 10 workers have lost their lives and a further 600 others have been injured. This has prompted calls for more strict punishment for companies that contravene safety regulations.
Cash flow remains a significant challenge in Hong Kong. “Pay when paid” clauses remain common in construction contracts. A 2011 government survey found that 45% of main contractors and 57% of subcontractors experienced serious delays in receiving payment, and there is little to indicate that the situation has improved markedly. Although the proposed introduction of SOPL may help to alleviate this difficulty, there has not been significant legislative attention given to this issue since a public consultation in 2015.
The number of significant infrastructure projects underway in Hong Kong, paired with restrictions on the use of non-Hong Kong workers, has led to labour shortages in the construction industry, driving wages and construction costs higher. This is compounded by a skills shortage and an ageing workforce (with an estimated 40% of construction workers being over 50). Managing these shortages is likely to be a substantial challenge for the construction industry in the coming years.
The UK faces a challenging macroeconomic climate, with low levels of growth and productivity. This has contributed to a rise in insolvencies in the construction industry, most notably Carillion (one of the largest UK contractors), whose insolvency has caused major problems for a number of government projects, facilities management contracts, and subcontractors in its supply chain.
The consequences of Brexit on the industry are still something of an unknown, but there is a risk that it could contribute to labour shortages, higher material costs and reduced foreign investment in infrastructure. Much will depend on the UK’s trading relationship with the EU post-Brexit.
Having said that, the fall in sterling has (in the short term at least) made the UK an increasingly attractive foreign investment opportunity.
There are opportunities for investment in emerging sectors like renewable energy and for efficiencies arising out of the use of new technologies and more collaborative ways of working.
The biggest challenge to the construction industry in the United States continues to be a shortage of skilled labor. During the last economic downturn, the construction industry in the United State shed a substantial number of jobs. As recovery has continued, those workers have not returned to the industry. In fact, the Associated General Contractors found in a recent survey that 75% of firms expect to add additional skilled labor in 2018, but that 78% of firms are having a difficult time locating qualified employees. See Seventy-Five Percent of Construction Firms Plan to Expand Headcount in 2018, Contractors are Optimistic About Strong Economy, Tax & Regulatory Cuts, January 3, 2018 (available at https://www.agc.org/news/2018/01/03/seventy-five-percent-construction-firms-plan-expand-headcount-2018-contractors-are-0). In addition, the construction labor force in the United States is aging out, and younger workers are not filling those vacancies.
There are, however, many reasons to be optimistic about the U.S. construction industry in the coming years. The U.S. economy continues its strong growth, and recent changes to U.S. Tax law should spur additional growth. In addition, the Trump Administration continues its effort to roll back regulations, making construction in sectors such as energy easier to commence. The Trump Administration is also anticipated to announce an infrastructure plan that is expected to provide a major influx of federal money into domestic infrastructure projects.
Lack of financing and rather often the disrespect of the applicable laws, which leads to litigation, instead of conducting business without problems.
Value Added Tax (VAT) was introduced in the UAE on 1 January 2018. While the introduction of the tax was a long time coming, many companies that are unfamiliar with such a tax regime are still coming to grips with the additional administration required.
Looking at the sector more broadly, on time payment remains a significant issue (and one that appears to be negatively impacted by the implementation of VAT, at least for the moment). Subcontractors continue to price on narrow margins and are unable to meet employer expectations when cash flow is poor. This is particularly the case on poorly scoped or specified projects where a construction contractor is left to design significant parts of the work on the job – as opposed to being provided with a comprehensive design.
While the industry has stabilised, a number of contractors are still carrying baggage in past projects with small to no margins – or even significant losses. Many are unwilling to pursue claims for fear of being blacklisted by employers, but are also reluctant to declare the loss and move on. This creates uncertainty within the company itself and the wider industry, and means many companies are still ‘buying’ work in order to offset other poorly performing projects.
One of the biggest challenges in the construction sector is the legal handling of construction delays, which are especially commonplace in larger construction projects. Many disputes between builders and contractors revolve around the question of who bears the additional costs for building contractors incurred by the delays. German courts are very strict about how to prove extra costs due to delays. As a result, the willingness of customers to pay for delay costs is very low. In particular, public customers, who are controlled by audit courts, tend to accept only those claims, that would be approved by a court.
The biggest challenge is asserting claims for additional costs and extensions of time where the progress of construction was frequently disrupted.
In our view, some the biggest challenges facing the construction sector in France are:
- the lack of available buildable land in large cities and especially in the Paris region, which limit the potential for construction, while there is a deficit of construction, especially of residential projects, in these areas. This supports a current trend to increase the density of projects in large Cities;
- the necessity to improve the environmental performance of buildings, which is considered as a priority by the French government given the important share of the buildings in the total consumption of energy in the country.
Among the opportunities, we can list:
- the strong development of the e-commerce industry has led to growing needs for new logistic projects across the country;
- new actors, with specific construction standards and needs have emerged to provide services adapted to recent changes in society and in work organization, such as co-working companies and co-living residential projects for young adults.
Greece has suffered throughout the last decade from a severe fiscal crisis. It was no surprise then that the construction sector was also intensely hit. In particular, in terms of private construction, we experienced an unprecedented fall in the prices of real property due to lack of demand. This, in turn, led many construction SMEs to face insolvency issues and banks to make lending terms for private construction almost prohibitive. In terms of large-scale construction projects (public works, concessions etc.), the scarce financial resources of the Greek State were targeted primarily to the repayment of public debt and the payment of public sector salaries and pensions and less to the promotion of new projects. In this respect, very few big ticket projects have been tendered out until recently and the local banks, which were recapitalised due to their capital insufficiency, took a very austere stance in embarking to their financing, at least not on commercially appealing terms.
On the other hand, we are lately experiencing a growing interest for the development or refurbishment of tourist properties, which in turn is expected to give a boost to the construction companies in the field. Also, the stabilisation of the Greek economy and the successful involvement of international financial institutions in the financing of large-scale projects (e.g. privatisation of 14 Regional Airports) is sending signal to the government to speed up the tendering of much awaited infrastructure projects that will have multiplier effects to the local economy (new Athens Metro lines, Egnatia Motorway, North Crete Motorway etc.).