|
This year’s State of Business report coincides with challenging market conditions for the consultancy and engineering sector. The overall market perception has moved on from the 2010-11 report of decreasing fees, order books, and staffing levels to one of conditions remaining broadly unchanged.
However, if the UK economy is to recover, broadly unchanged conditions will not be adequate. Given the scale of the infrastructure challenge in the UK, and government’s commitment to infrastructure investment as a means of achieving growth, this year’s report concludes that there is still significant work to be done to secure economic recovery.
The economic updates over the past few issues have explored whether UK growth is lagging behind that of its international competitors and how far and fast costs are likely to drive innovation. Within this wider context it is vital that ACE draws on the opinions and expertise of its members to provide a view of conditions in the industry. The State of Business report does this, and this year’s survey reveals a number of findings:
Flat prospects for UK economy over the next 12 months
The overriding belief is that there will be little change in the economy over the next 12 months. Gross incomes, fee levels, PFI/PPP activity, tender success rates, staffing levels, cash flow, economic stability, volume of bidding activity, international new orders, UK margins and international margins are all rated as unlikely to change.
This reflects the current levels of uncertainty within the market. The credit crisis, recession and subsequent increase in sovereign debt are at the forefront of investors’ and businesses’ concerns.
Shift towards private sector work
The government has made rebalancing the economy one of the key aspects of its budget plans, moving activity from the public sector to the private sector. This year’s State of Business report reveals that there is evidence of this occurring, with public client activity reported by 65% as undergoing a decrease whilst private sector activity was rated by companies as improving, not only over the past 12 months (42%) but also over the next 12 months (49%).
Other positive prospects were reported by companies for a number of sectors. Sectors such as energy, utility and waste are viewed as providing positive earnings potential. These sectors, whilst having some government intervention, also have significant private involvement.
Respondents reported the commercial property and housing sectors as being their most profitable in our 2011-12 survey. Comparison with the previous survey shows that, since the publication of the Comprehensive Spending Review and 2011 Budget, there has been a shift from the most profitable sectors being reported, from those that are more reliant on public spending, to those with more private involvement.
Significant interest in international markets
This year’s State of Business survey comes at a time of international volatility, with a number of countries in Europe struggling to control their fiscal positions. In addition, the downgrading of the US highlighted the wider contagion that has taken hold of public accounts following the financial crisis.
However, with sluggish domestic growth in the UK, companies that wish to improve margins, expand their operations and grow out of the recession are looking towards international markets. More importantly, less traditional international markets have a greater focus than they would otherwise have had a few years ago.
Asia, China, Russia, Africa, Australasia, South and Central America and Eastern Europe are all seen as providing some degree of opportunity in terms of earnings over the next three years, whereas Western Europe has shifted to a position of stability at best.
When asked about the markets that companies intend to enter it is not surprising that the Middle East is still considered a key market. Whilst the Asian markets were considered to provide growth opportunities, the number of companies indicating they intended to enter this market was significantly lower than that of the Middle East. This may reflect the unfamiliarity with the local markets on issues such as politics, planning, legal processes and regulations.
In terms of the sectors that participants are likely to enter internationally, there is a far greater optimism and mix than domestically. The utilities, energy/power generation, industrial, commercial, transport and housing sectors were all viewed by more than half of companies as sectors in which fee earnings are expected to increase.
Early indications of a skills shortage
Since 2009, expectations regarding the ease of recruitment have been shifting towards being more difficult with only 5% indicating some level of difficulty in 2009-10 compared to 27% in this current survey. Interestingly, when asked to provide expectations for the next 24 months, companies reported that conditions will continue to tighten.
When asked more specifically about the roles in which companies were having difficult recruiting, respondents mentioned a variety of skill sets. However, difficulties tended to be in the area of engineers with a few years experience.
This is likely to be a particularly vulnerable area given that recruitment rates have fallen, leaving graduates without the opportunity to gain experience in the industry. Such gaps need to be identified and targeted to ensure that a shortage does not occur.
The government is taking the right action to address the UKs deficit
In last year’s State of Business report we asked companies if they felt that the UK’s sovereign debt was of concern to their organisation. Approximately half of companies reported this to be the case. However, since then we have seen the US credit rating downgraded, Greece’s position worsen considerably, a rescue package implemented for Ireland and the contagion spread more widely into the Eurozone with countries such as Italy, Spain and Portugal now seen as potential risks. It is therefore unsurprising that, as a result of this, the number of companies that consider the level of sovereign debt to be of concern has increased.
Accompanying this increase in concern over the UK’s deficit has been a rise in the number of companies that believe that the coalition government has effective policies in place to deal with the deficit.
This emphasises that companies feel that the UK can ill afford to have the international community and investors lose confidence in its economy and ability to service its debt.
More priority is needed on delivery of infrastructure
This year’s report provides more evidence of companies’ belief that the UK’s infrastructure is falling behind that of our international competitors. This suggests that further priority needs to be given to the UK’s infrastructure to ensure international competitiveness.
Given the government’s concern surrounding economic growth, and its commitment to infrastructure investment, it is interesting to note that 70% of companies feel that delaying infrastructure spending is having a detrimental effect on future economic growth. This would suggest that, if the government were to bring forward projects or to leverage private funding more effectively to kick start projects, there is real potential to improve the UK’s growth prospects.
Since maintenance is also an important part of ensuring asset efficiency companies were asked if maintenance cuts would push up long run capital costs. Some 60% of respondents agreed or strongly agreed that this would be the case. This suggests that cuts in maintenance should not be made for short term gain if it is found that they increase long run costs.
This year’s state of business survey has guest contributions from:
- Simon Kirby – director of infrastructure projects, Network Rail
- Angus MacNeil MP - SNP spokesperson for transport and rural affairs
- Michael Parkinson - head of research - Brewin Dolphin
- Laurence Robertson MP – former minister for Northern Ireland
- Subhash Thakrar - chairman of the London Chamber of Commerce and Industry (LCCI) and senior partner at Blackstone Franks LLP
|