EIC meeting Vienna 20th April 2018 Roger April 2018 Flanagan - - PDF document

SLIDE 1

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

International rnational construction - nstruction - it’s al s all ab about t compe mpetitiveness titiveness

Ro Roger F ger Flana anagan an – – Unive nivers rsit ity o

• f Readi

Reading

Competitiveness

• Competitiveness i

etitiveness is fund fundamental amental to to succes success; ; crea creatin ting new new fo forms rms

• f compet

etitive a itive advantag age i e is key

• New

New play player ers are no are not t hide hidebou bound by by t the e traditional itional co competitive etitive mode models

• It’s

It’s a a fast c st chang anging wor world with with the the speed of speed of chang ange inc increasing

• Uncert

Uncertainty and risk is y and risk is the the prob problem, in in const construc uction we we are are hideb hidebound by by illus illusions ns o

• f certaint

certainty, then then wo wond nder why why it it went went wron wrong

• Under

Understa tanding g the DNA the DNA of the co the compe mpetition is very is very impor important

Creating competitive advantage in construction

• Lo

Lowes west pr pric ice

• Consistent h

nsistent high quality

• Custome

stomer f focused, t cused, the customer er i is King ng

• Good r
• d record f

cord for s r safet fety and and he health alth

• Capabl

ble o e of speed o eed of deli livery very

• Prov

Provid iding the mos g the most attr attractive proj project fina nancin ing pack ckag age, a e, and guar arantees antees

• Desi

Design gn capab capabilit lity and the and the capa capacity to to inte integr grat ate desi design gn and and prod production

• n
• Havi

ving o ng off-si site te p production f

• duction faci

ciliti ties es and capabil bility y to in increase ease speed o eed of production

• duction
• Strong

ng b balance s lance sheet eet

• Appeti

tite f te for r r risk

Creating competitive advantage in construction

• Reco

cord o

• f co

corp rpor

• rat

ate so e social resp cial respons

• nsibili

ility ty

• Politic

litical s l support f rt from g governm rnment t nt throug ugh h pro project creat creation

• n and expo

and export rt g guar aran ante tees

Clu Clueless You don’t know what you don’t know Disc scou

• uragi

ragingly re realistic You know what you don’t know Naive ively c conf nfid ident You think you know, but still don’t know what you don’t know Master ery a y achieved eved Now you need to stay competitive

Looking a ing at c compet mpetitiv itivenes eness

Op Optimistic You feel confident about your strengths against the competition

The c constru nstruction tion sector i ctor is t trying t ying to f fly a Dakota a kota at supersonic personic speed eed with s system ems a and d procedures

• cedures that

at w were never d designed f gned for speed o eed or t turbul ulence n ence now e encounter untered o d on c cons nstr truction p uction project

• jects

SLIDE 2

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

Innov Innovators rs, at at leas least they they tr tried ied

Using the the ana analogy of

• f the

the ai airc rcraft industry

Speed eed Ear Early days days Pr Precision f form rmation ion Get Getting i it wro wrong

Hea Heavy l y liftin ing Difficult manoeu euvr vres es Technology Comfort Fuel a and power = d power = mo mone ney/pro project f t finan nance Opera Operating c crew ew = = managemen ement t team am Perfor

• rmanc

mance o e of the e airc rcraf raft = = pr producti uctivi vity ty Passe Passengers = s = clie lient nt Nav Navigation = = for form of

• f

contract ract a agreement eement Take ke off =

• ff = bi

bid st d stage and and ten tender Lan Landin ing = p = practical co completion Timet metable = = pl planni anning ng pr prod

• duction on
• n si

site te La Land ndin ing g gear/fit ou it out = t = specia specialty lty c contr ntractors Design an and pr produ

• duction of
• f th

the air aircraft is is in integrated = = indepe pendent desi t design t team cons nsul ulta tant nts design c s design constru nstructio tion pr proj

• jects for

for a a fee fee Designe gned f for weathe weather u r unce certa rtainty wi with t th turb rbul ulence, wind sh , wind shear ear, typho phoon, et n, etc. =

• c. = illusi

usions o ns of certai rtaint nty i y in c cons nstru tructio tion, a , and c clou

• uds

ds o

• f uncerta

tain inty ty a and r d risk i in c cons nstru tructi tion

• n, o

, often n n not we t well ll for foreca cast

• The

The sep separation

• n o
• f desi

design gn and and prod productio uction i in constr nstructio uction w was n never ver designe gned f for t r today’s c y’s comp mplex lexities, ties, r rules, s, and r regul gulations t tions that t thrive ve

• n burea

bureaucracy, and liabilit and liability

• The

The bidd biddin ing/ g/tender erin ing g syst system em is br is broken

• ken, pr

prici icing g incom incomplet lete inf inform rmation is is unreal unrealistic, no , no plan plane e would fly w y with thou

• ut f

full inf ll inform rmation

• Construction p

nstruction projec ect c costi sting systems a stems are h histori

• rical,

al, n not d dynamic mic

• Cash flow has becom
• w has become criti

critical al w with th paym payment syst systems desi designed for for the the

• ld world o

d of constr nstructio uction w wher ere d e direct ct emplo ployment w ment was c common mmon (without hout fuel t the p e plane c e crashes ashes)

)

The constr nstructio uction s sector

• r d

does a amazing g things w with

• utdated s

ated systems an s and procedure

• cedures – we n

need ed t to move o ve on

Cons nstant tant c change ge With th t the r rate o

• f change

ange i in t the l loca cal a l and n nati tiona

• nal c

cons nstr truc ucti tion m

• n marke

rket a and the r e rapid a d advanc ncement ement i in g globali

• balisat

ation a ion and t technology, nology, t tomor morrow w w will n not be the the s same as as tod today Fo Four o

• r five d

deca cades ago ago, m mark rket re reactions w were re m more re p predictable The The ch challenge is is th that m many of

• f the

the” tra traditional systems” ems” u used i in t the i e indu dust stry t today w y were designed f for a r a more re p predictable ind industry tha that wa was n not s t subj bject t t to cons nstan tant c chan ange ge Tur Turmoil is is no not ne new

SLIDE 3

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

• Gr

Grea eater r r risk an and mor d more u unce cert rtainty

• More c

e compl mplexit xity

• Fa

Failure o

• f systems li

linked to to o

• utdated id

ideas

• Increasi

easing p ng prices es c caused b ed by uncontrollabl able e even ents

• Emerge

mergenc nce o

• f Chin

ina a a as a ma major po r powe wer i r in i inte tern rnati ational c cons nstru tructi tion

• Clie

lients nts demand demandin ing bet better v value lue for for mone money

• Digiti

tisati tion br brea eaki king ng down pr down profe

• fessional ba

barriers rs

• Demand

nd for for social social r respo sponsibility ty a and a d acco ccounta tability

2008

Accountability replacing trust

To To this this . . . . . . From

• m this .

this . . . . . . . .

Peak Peak of

• f inf

inflated expe expect ctatio ion Pla Plateau of

• f

per performanc nce Trigger o gger of enligh ghtenment ment Trough

• ugh o
• f

disillu llusi sionment ment Slo Slope o

• f ne

new enligh ghtenment ment

Where is ere is the E Europe pean an c constructi nstruction

• n sector

ctor on t the scal ale o e of e enlightenme lightenment? nt?

Euro Europe

Bole Intern le International Air l Airpor

• rt,

t, Addis Addis Abab Ababa, Ethi Ethiop

• pia

ia

Will C ill Chine inese c compan anies c s cont ntin inue ue t to be be competitive i in A Afric rica a and La Latin tin A Ameri merica? a?

Gl Global al C Constr tructio uction O Output tput Markets

Updated 2018

2017 2017 Globa

• bal annu

annual co construction

• n o
• utput ≈ U

US$8. $8.2 2 tr trilli illion

• n

+ p + professional serv rvices + lo + local tax taxation + in + informal sect ctor

All figures are annual output in current US$ billion (2017) – not gross value added Exchange rate differences will have a significant effect on the output figures Canad Canada 100 100 US USA 1273 1273 Latin & Latin & Ce Centr ntral Ame Americ ica 500 500 Afr Africa 150+ 150+ Eu Europe 1806 1806 China China 2868 2868 Ru Russi ssia 107 107 Ind India 332 332 Ja Japa pan 431 431 Kore Korea 182 182 Malay alaysia 4 a 46 Austral Australia 164 164 Th The Gu e Gulf 105 105 Hong Ko ng Kong ng 31 31 Ire Irelan and 15 15 Br Brazil 120 120 Output ut i is a around nd 30% in 30% infrast astructu ture and and 3 30% ho hous using

Some o

• f the a

annua nnual o l outp tput da ut data a ta are n e not r t relia liable bec because

• f
• f da

data c colle llection di n diff fficultie ties i in some some c coun untrie tries a and t d the la lack o

• f re

reco cording f for the r the inf informal s sect ctor

Ni Nigeria 21.4 21.4 Sout uth Af h Africa rica 9.6 9.6 Et Ethiopia 7.5 7.5 Ang Angola 7. 7.5 Tanz nzan ania ia 5.4 Sa Saudi Arab Arabia ia 45 45 Pa Pakistan 6 6

Marke rkets ar s are c e cycli clical al w with very ry differe erent s t structur ures, lo es, localised sed an and reg

• regiocentric. I

It is not a t a homogene geneous m

• us market. To
• rket. Today’s m

y’s markets rkets ar are chara e characterised by by a a shark shark’s f fin, no n, not a t a bell shap bell shaped ed curve curve The e vi visi sible and i and invi visible barr barriers to entr to entry are di are diff fferent. Some m me markets ar rkets are c closed ed Th The s speed eed of t the m e marke rket collapse llapse in in many ny market markets is is faster than the er than the climb climb f for r recovery Shift in ift in centre ntre of g gravi avity t y to different erent markets rkets

SLIDE 4

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

The s e state ate of c construction truction ar around th

• und the w

e world rld

The d e developed w veloped world f rld faces ces: efficiency cy/pro roduct ctiv ivit ity/cost st/q /qua lit lity chal challe leng nges

• Dema

Demand f for mo r more re ef effic ficient infrastructure s astructure services rvices

• Agei

eing i infr frastructure, the need the need for for repa pair, upgra upgradin ing, g, repl placem emen ent

• Clima

limate chan change

• Growth o
• wth of megaci

cities ties

• Int

Integration o

• f s

service rvice for mo r more re resili ilien ent inf infrastructu ture

• Bett

tter v valu lue e for mo r money in in infrastructure d astructure delivery very

• Hi

High gher qual quality

• Pr

Projects r

• jects running

nning over b er budget dget an and

• ve
• ver ti

time

The d e developing w veloping world : rld : efficienc ficiency/ c / capacity pacity buil buildi ding ng/cost chal challe leng nges

• Rapidl

Rapidly incr increasing urba urbanisation

• n
• De

Dema mand f for r r resi sili lien ent t infrastructure astructure

• Clima

limate chan change

• Growth o
• wth of megaci

cities ties

• Chal

alle lenge o

• f banka

bankable proj projects

• Grow
• win

ing po popula lation

• ns
• Ov

Over r er relia liance upon e upon fore reign ign aid aid and f and fina nance

• Lac

Lack of capa capacity buildi building in g in the the constr nstructio uction s secto ctor

• Corru

rrupti ption

Annua Annual s spen end per capit per capita in in co cons nstructi tion: Pakist stan U an US$70, 70, Nordic c ic countries U ies US$4,000 000

What c charac acte terises c rises constru tructio tion a around t nd the world rld Consol nsolidatio ation - n - the big c consul nsultants tants and c contra ractor ctors a s are g gett tting ing big bigger thr through mer mergers and and acqu acquis isitions The construction s nstruction sector i

• r is one

e of t the m most st i important i rtant industry stry sectors f ctors for e r every c ery coun untr try, y, f few g w governme vernments nts real ally u under ersta stand t d the dyna dynamics of the sect the sector Big dif differences in in the spen the spend per capit per capita in in co cons nstructi tion

• n acr

across the the globe- ar around US$3, $3,000 000 pe per capit capita in in the de the deve velop loped w world rld, ar arou

• und

US$10 $100 in 0 in par parts s of the the de devel veloping world rld Pr Proj

• jec

ects ar are g e gett ttin ing big bigger w er with th mo more re me mega gaprojec ects, mo more re PPP PPP deri derivatives, and mo and more dem demandin ing g clien clients More re co complexi xity, mo , more r re risk, sk, and and so some disillu disillusion

• nment -
• need to

to chan change ge the the deli delivery mec mechanis ism for desi design gn and prod and production

• n to

to g give che cheape per, s r, safer, fer, and and hig higher q er quality ality What c charac acte terises c rises constru tructio tion a around t nd the world rld The The impor importance of safet safety and he and healt alth, chan changi ging the the cultu culture in e in the the indus industry ry to to beha behaviou

• ur base

based safe safety The The chal challen lenges es o

• f co

corru rruption in in its its dif differ eren ent g guis ises es Lo Localisation

• n, lo

loca cal jo l jobs bs f for lo r loca cal pe l peop

• ple,

le, lo loca cal co l cont nten ent Need Need to to impr improv

• ve prod

productivity on the jo the job b site site

“One B Belt, On One R e Road” in init itiative The “S “Silk ilk R Road E ad Econ

• nom
• mic

ic Belt” ” and “2 “21st C t Century M Mari ritime S Silk lk R Road” ad”, i initia iatives f firs rst t introduced by by X Xi Ji Jinp nping i in the fa e fall of 2013

• f 2013

New r regi gional i instituti utions ns, such a as t the A Asian Infrastr truc uctur ture I Inves vestment ment B Bank nk ( (AIIB) an and N d New Si Silk Roa Road F Fund (N (NSRF), ar are des designed in in par part to com complement an and su d support th the B Belt a lt and R d Road’s ad’s d developm lopmen ent The B Belt lt a and R Road wi ad will ll improv

• ve C

China’s a’s i inter ternal e al econ

• nom
• mic i

ic integ tegrat atio ion and compet mpetit itiv iveness ess a and spur mo more r regionally ally b bala lanced gr growth th

US$1.36 t 6 trillion lion i invest stment ment

The Silk Road Economic Belt is envisioned as three routes connecting China to Europe (via Central Asia), the Persian Gulf, the Mediterranean (through West Asia), and the Indian Ocean (via South Asia)

Geop

• polit

litical initiat initiative ves cr crea eating opport rtunities es f for the r the constr nstructio uction secto ctor w with C China i in contr ntrol

Chin inese wo worke rkers a s at a a tunne unnel bei being c g create ted n near V ar Vang ng Vieng, L , Laos. . Part o rt of a US$6 $6 bi billi llion pr

• n project t

that wi at will ll c conn nnect e t eigh ght c t coun untri tries

Security is ty is a a big g is issue, e, 44 44 worke rkers have have been k been killed illed in in at attack cks by by Pak Pakistan milit militants on

• n road

road proje projects US$62 US$62 billi billion inves investment in in CPEC CPEC

SLIDE 5

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

So Some myth mythol

• log
• gy and so

and some big big que questi tion

• ns o
• n co

competitiv iveness

All All the the Chin inese c e companie ies b behave have the the same, t they ey use low use low cost cost, low , low qualit quality labou labour, , work rking in in poor poor cond condit itions. . There There is no is no poin point in in tryin ying to compe compete w with t them on em on pric ice in Af in Afric rica, L Lati tin n Am Americ erica, and and o

• ther

her p parts rts of the d the develop evelopin ing w worl rld The The Chin inese m e model is l is changi anging, their lab their labour and and overhe verhead costs are are es escala lating rap rapidly, y, lab labour is b becoming ng more e expensiv nsive a e and m more demanding

• ing. C

Chinese c ese companies a anies are a acquiri iring l local l compa companie ies, and seek and seekin ing inves investment oppor

• pportunities

es as is h happeni ning i ng in the U USA, Canada da, , Austral ralia, ia, and N New Z Zealand and Af Afric rican and and d develop eveloping w worl rld c coun untr tries are o are only ly intere interested in in lo low c cost, , no not b t best value value Corru Corruptio ion in in India India, Bang Bangladesh, and Pak and Pakistan an is endemi is endemic, yet yet t the e Chin Chinese compa companies seem seem capab capable of

• f play

playin ing t the g game me

Wron

• ng d

g decisi sion

• n

Slow

• wly, bu

, but s t surely ly, t , the m message ge i is gettin tting t through rough – –qual uality c coun unts

• ts. It

. It wo won’t h t happen

• vernigh

ght China w a wants t s to change ange t the g e game a me as well. T The S Stat ate O e Owned E d Enterprises a s are n not t the e same a as the C e Chinese p e private c e comp mpanies anies Chines ese c e compani mpanies a s are b buildin ing a g a new c comp mpet etit itiven iveness ess m model w l with i invest vestmen ment, a and pr profe

• fessional ser

servic ices es i in t the mi mix

Com Complexity Ris Risk & & uncer ertainty-mo ty-more e clou

• uds of
• f uncertainty

Conver nvergence gence Disr Disruption

• n and

and chan change

FOU FOUR I ISSU SSUES I IMPA PACTING CONS NSTR TRUCT UCTION C ON COMP MPET ETITIV ITIVEN ENESS ESS

Chan ange is is happ happen enin ing f fast st, we have have moved moved f from

• m increm

incremen ental l chan change ge to to co cont ntin inuous chan change ge Acce Accelera ration

• n and spee

and speed o

• f chan

change ge Who Who would have believ have believed 5 5 years years ag ago that:

• that:

…. and sells their Infrastructure and Building business for US$84 million to a Black- Empowered company …. and sells their Infrastructure and Building business for US$84 million to a Black- Empowered company

Af Africa’s lar larges est intern internat ational co l construction

• n co

company exits c s constr nstructi uction Af Africa’s lar larges est intern internat ational co l construction

• n co

company exits c s constr nstructi uction

SOUTHERN PALA PALACE GR GROUP- LED C D CONSOR ORTIUM UM ACQUIRED MURR MURRAY AN AND ROB D ROBERTS’ INFRAS ASTRU TRUCTU TURE RE A AND BU BUILDING BU BUSINESS The fully-funded purchase consideration is R314 million. Murray & Roberts CEO stated “This “This sup supports

• ur lo

r long- ng-term strat strategy gy and and cre creates the the f first majo rst major b r black lack-owned inf infras astructu ture b business in in South uth Af Africa. rica.”

1st Nov 2016

A m multin inat ational ional specialist alist engineeri eering g and and constr nstructi tion

• n

group f p focuse sed d

• n the

the na natura tural reso resour urces mark market se sect ctor

1902‐2017

Disr Disruption

• n and

and Change ge

Part o Part of a a settle ttlemen ent t betw tween the go the governm vernmen ent and and S SA’s ’s s seven even larges largest c cons nstructi tion

• n and

and engine engineerin ing group groups for their for their part in collu part in collusion in the in the run- run-up up to the 2010 to the 2010 Socc Soccer er World World Cup, w Cup, whic ich requi required ed t them em to sell at sell at least least 40% 40% o

• f th

their r domest stic i infrast astructure re businesse sses s to to b black k em empowe werment t partne rtners, or to to m mentor ntor up up to to three three black const nstruc uction

• n companies

s

• ver

ver a a period riod o

• f seven

even y years ars. Net loss of R347 million- Restructuring 5 large 5 largest t So South uth Afric African constr nstructi tion

• n c

companies s are r restru ructur cturing ing following ng loss losses

Disr Disruption

• n and

and Change ge

2016 L 2016 Loss b before tax € x €445 445 millio llion 2015 L 2015 Loss b before tax € x €119 119 millio llion

One of t One of the lar e largest Spa Spanish con contractors

After four decades of building some of the country’s iconic

• structures. Saudi Arabia, Saudi Oger ceased trading on

July31 2017

Disr Disruption

• n and

and Change ge

De Decla clared bank bankru rupt (Jan (Jan 2018) 2018), debts debts of £1.5

• f £1.5

billi billion, t , taking ng spec specialist alist contr ntractors w with th them them De Decla clared bank bankru rupt, faile failed t to pay w pay work rkers for six for six mont months UK l largest c t constru tructi tion firm. firm. Turna Turnaround from loss from loss to to small p l profit it ( (declar lared ed March 2018) rch 2018) Sold th the concession ssions s bu busi siness st stre ream am t to prov provid ide cash (De cash (Dec 2017) 2017)

SLIDE 6

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

The S South uth P Pacif cific’s c’s l large rgest c t cons nstruc tructi tion

• n c

compan any, F y, Fletch cher C Cons nstru tructi tion i

• n is

wi withd thdraw awing fr from

• m bu

buil ilding pr proj

• jects

ts follo following pr prof

• fits

its wa warnin rnings a and l d loss sses of

• f NZ$4

$454 54 mi mill llion i n in 2 2017, a and N d NZ$29 $292 milli 2 million i in 2 2016 Chin ina S a State ate C Cons nstru tructio tion e ente ters rs t the N New w Zealan aland m market w rket with m th major p jor project ects f for Chines ese i e inve vest stor

• rs

Odebre Odebrecht, t the l e larg rgest en engineerin ing an and d co construction co contractor in L in Latin Am America wi with 1 th 128,00 28,000 st 0 staf aff f fine ned U US$3.5 $3.5bn f n for br bribery a y and c corruptio tion. Now Now b being re restructured

Disr Disruption

• n and

and Change ge

Ode Odebrecht had a ad a de depar partment nt de dedi dica cated t to brib bribes, , known

• wn as

as the Div Division of St

• f Struct

ructur ured Ope

• Operations. Half

Half t the compan company’s work workforce has has been laid been laid off

• ff

And Andre Guti tierre rez a z and OAS OAS , , tw two of Brazils large rgest c t constr nstructi tion enterp

• n enterprise

ses a s also em embroi

• iled

in Operat ation ion Lava J Jato (Car W Wash) ) OAS had 100,00 OAS had 100,000 staff staff, file files for for bankru bankruptcy prote protection

• n and restr

and restruct cturin ing Compa Company being being rest restruct

• ctured. Fine

. Fine st stil ill l

• utstanding

ing, origina inally s lly seeking ing w was US$12 US$12 billi billion, but but reco recognising it it woul uld bank bankrupt t the compa company! Founded 1948

CCCC a CC acquired John Hollan John Holland i in A Austral ralia for for U US$64 $642 milli 2 million t to bec become a a major p play ayer in b in building and and inf infrastructure d deli livery in Aus in Australia

Disr Disruption

• n and

and Change ge

Chi China's CCC CCCC Buy Buys Ae Aecon for CA

• r CAN$930 Mil

Million in Can in Canada Nov 20 Nov 2017

Conver nvergence gence

Conve nverge genc nce o

• f

desig design a and pr prod

• duct

uction wi will ll increase p ease perfor

• rmance

mance and pr d prod

• duc

ucti tivity, B , BIM Conver ergen gence o e of infor format ation a n across ss t the e life o e of the p project ect, w whol

• le l

e life t e thinking Conve nverge genc nce o

• f

technologi gies, I es, ICT, Auto- to-ID, i inte terne rnet o

• f thing

ings Conve nverge genc nce o

• f desi

design gn, , ma manu nufact cturi uring, a and d cons nstru truction pr producti uction (o (off-site p production) Conver ergen gence o e of companie anies, s, t the b e barriers bet between c contra ntract ctor a and pu d pure pl play cons nsul ulta tant nt is c chan angi ging, t ng, the a assum ssumptio tion that bi big i is best best Conve nverge genc nce o

• f

di disci scipli line nes wi with mor th more integra tegration a n acro ross di disci scipli line nes

Health & th & Safety ty Bi Bidd dding Des Design En Environmental Complia mpliance Cy Cyber sec security Sec Security Wea Weather Tech chnolo logical cal Polit litica ical Corru rrupt ption ion

Balancing the ri risk sks

Reputa tati tion

Risk and Risk and Un Uncertainty

Pakistan

SLIDE 7

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

Very ry rarely rarely are are they they linea linear and r and it it is is diffi difficult t to fore forecast at at t the bid bid st stag age

Path depe Path dependency is is an an impo important aspec aspect of risk

• f risk

Ris Risks hav have a a un unique s sequence, rat rather li like DNA DNA

Risk and Risk and unce uncerta tainty

Accu ccumulatio mulation r risks sks

Trigger

Risk Risk

The problem with risk is non-linearity, interconnected events bounded in complexity The traditional methods of managing big projects were not designed for current risks and such dynamic interconnectivity Swiss c cheese m eese model del – gaps created across the supply chain and project time horizon

Com Complexity Ever erythi ything ng we d do has b beco come m me more c compl mplex

THREE THREE PROPOS PROPOSITIONS NS

PROPOSITION PROPOSITION 1 1

CREATING TING COMPET ETIT ITIVE A IVE ADVANTAG NTAGE I E IN T THE I INTERNAT ATIONAL IONAL CONSTRU TRUCTION M ION MARK RKET ET HAS C CHANG ANGED

Design and engineering professional service firms will increasingly move into the construction/production space Chinese construction firms are benefitting from the close links between investment/finance, political influence, and construction. They are becoming more efficient, also more productive with new digital technologies. The best are very good, the weak are very poor European construction enterprises must respond by changing the delivery model by embracing the supply chain in a different fashion We make a decision based on price, quality, safety, technical advantages, specialization, social responsibility NEW MODEL FOR COMPETITIVE ADVANTAGE IS NEEDED

Unclogging the pipeline of work

Consol nsolidatio ation a n across ss the e engine neer ering a g and constr nstructio uction secto ctor The The 2017 To 2017 Top Inter p Internat ational l Contra ractors s 2017 17 17 of the the to top 50 p 50 ar are f from

• m C

Chin ina

SLIDE 8

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

Emergi Emerging Natio National Region Regional

Time

Scale/size Mega Mega

Vi Vinc nci ( (France) Bouygues ( gues (Franc nce) e) Sk Skans anska ( (Sweden) CSCEC CSCEC ( (Chi hina) CCCC ( CCCC (Chi hina) Ch Chin ina Ra Rail il (Ch (China) Ch Chin ina Ra Rail ilways ys (Ch (China) Po Power Chi China (Chi hina) Fer Ferrovial (Sp Spain) Hyund undai ( (Korea) ACS ( ACS (Spain) Odebrech recht (Brazil) il) Bech Bechtel (US (USA) Fl Fluo uor ( (USA SA) Techni nip ( (Franc nce) e) Sam Samsung ( (Korea) Salin lini Impregilo gilo (Italy ly)

Con Contract ctor clus clusters rs

Sh Shim imizu ( (Japan) Takena naka (J (Jap apan an) Taisei ei (J (Jap apan an) Kaji jima (J (Jap apan an) Ob Obay ayashi hi (J (Jap apan an) Multiplex iplex ( (Australia) GS ( GS (Korea) Bal Balfour Be Beatty atty (UK (UK) Gammon mmon ( (Hon

• ng

Ko Kong) Sunw unway ay (M (Mal alaysi sia) Ja Jan de Nu de Nul (Lux (Luxembour urg) Sumi mitomo mo Mi Mitsui (J (Jap apan an) Royal BAM BAM (Ho (Holland nd) CIMIC ( (Australia lia) Be Beijing Co g Constr

• nstr. E

Eng (Chi (China na) McConnell D ell Dowell ll (Australia lia) Oras Orascom (Egyp ypt) Od Odebrecht (Br (Brazi azil) FC FCC ( (Spa pain) En Enka ka ( (Turkey) y) Ar Arab abtec (UAE UAE) Be Besi six (Be (Belgium) Av Aveng (S g (South th Afr Africa) ca) HLG HLG (UAE (UAE) Ki Kiewi ewit (US (USA) Hi Hindus ustan n (I (Ind ndia) Lar Larsen & & Tou Toubro (I (Ind ndia) Vei Veidekke (N (Norway) NC NCC (S (Sweden) Tu Turkish Con Contractors Pr Private Ch e Chinese e con contractors Ru Russ ssian con contractors

A A gap is is eme emerging bet between the bes the best and and the the rest rest Chin ina und unders erstands spec specia ialist de desi sign gn and and insta installation

• n

The impor The importance o

• f desi

design gn What c What char aracterises engin engineer ering and desig and design c consu nsultants? Consol nsolidatio ation – n – merger gers a and acquisi isitio ions w ns with the b big get getting b bigg gger Diversif ificatio ation n into e enginee neering ing sector

• rs, s

s, such a ch as aeronauti nautical al, a , automoti motive ve Scale, e, s some h me have ve beco come me t too b big t to survive ive as an independent d pendent design c consul nsultant tant s selling ng soft soft ser servic ices Geog

• gra

raph phica ical s spread read What What chara characteri rises eng engineerin ing and desi g and design gn co cons nsulta tants? Integ Integration o

• f

desi design gn and and pr prod

• duction

tion Asian c n consulta ultants g nts getti tting ng a a wa wake u up c call More re co comme mmercia rcial, d desire f re for r pr profit

• fitabil

ilit ity Embra Embracing g dig digital l eng engineering

Design Production

Rise Rise o

• f the

the Starc architec ect Ab Absence o nce of C Chinese inese consul nsultants, tants, b but t that will chan ill change Starc archit itects/d /des esigners rs hav have be been en suc successful in in winn nnin ing maj g major r pr proj

• jec

ects, they they dev developed repu reputation

• ns f

for des design gn ex excell llence and and proj project deliv delivery

There are very few big name China designers

SLIDE 9

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

Consolid lidation acr across ss the the de design gn and and engi gineeri eering g sec sector

The 2 2017 T 017 Top In p Inte terna rnatio ional nal D Design c gn compan anie ies

CH2M now part of Jacobs DAR Group share ownership in Worley Parsons

No pure play Chinese consultants are in the top 50 (one contractor (CCCC)

Em Emerging Bo Bout utique Reg Regional Mix Mixed m mode de Mega Mega

Time Ja Jacobs cobs (U (USA) AECO AECOM ( M (USA SA) Arca cadi dis (Holl Holland) d) WS WSP ( (Canad ada) a) Egis Egis (F (Fra rance) Ra Rambøl mbøll (De Denmark) ark) Surbana ana Jurong (Singap ngapore) e) DA DAR (Le R (Lebanon) SNC La Lavalin Atki kins ns ( (Canad ada) a) Ar Arup up ( (UK) K) Syst stra ra (F (Fra rance) Royal H l Haskonin ing (Holland) Mo Mott Mac tt MacDonald (UK) Fugr Fugro (Holland) Worley rley P Pars rson

• ns (A

(Australia) Stan Stantec (Can Canada) Sw Swec eco (Sw Swed eden) Aureco con ( (Australia lia) Nippon ppon K Koei ei (Ja (Japan) Bech Bechtel ( (USA SA) Fl Fluor ( (USA SA) Technip nip ( (Fra ranc nce) Hy Hyundai ( (Kor

• rea)

Oz Ozburk (T (Turkey) CSCE CSCEC ( (China) Power C r China ina ( (China hina) Si Sinopec ( (Chi hina) CCCC CCCC ( (China) Na National pl players specia ialis lisin ing g in nic in niche ma markets ID IDOM OM (S (Spain) Poyry yry (Finla nland) Cowi Cowi (D (Denmark) Kh Khat atib an and Al Alami (L (Lebanon) Bl Blac ack & & Veat Veatch (U (USA) AF ( AF (Swed weden) Sa Samoo (Ko Korea) Ay Ayes esa (Spain) Fi Fich chtener (G (Germany) Ty Typsa (Spa Spain) ACE ( (Greec ece) e) It Italconsult (It (Italy) No Norconsult (No (Norway) Tata Tata ( (India) Bot Botek (Tu Turkey) y) BAC BAC (S (Spain) Ch Chines ese Desi Design ins institutes St Strong ng na national pl players

Engineeri neering c consul nsultant tant clus clusters rs A A gap is is eme emerging bet between the bes the best and and the the rest rest

Un Unde derstand We We need need a a much better tter und under erstan anding of the D the DNA, the d A, the driver ivers, and and the b the business model l of

• f

the c the compet etit

• ition. Do no

not as t assume that b that because e they they are a are a contr ntractor

• r, they have the s

they have the same sys systems and and appr approa

• ach.

. Embrac Embrace co-op co-opetition Develop evelop a a different ap approa

• ach to

to deali aling w with th the C the Chine inese compet etition.

• n. Em

Embrac ace and and us use e thei their s r supply c chains, look a at collaboration w

• n with s

th suppliers, s, manuf nufactu turers, a and compone

• nent

t teams

• ams. Embrac

Embrace co-o co-opetition. Chang ange t the e game me plan plan

PROPOSITION OSITION 1 1 PROPOSITION OSITION 2 2 is about g gaps ps

PR PROPOSITION OPOSITION 2 CLOSE OSE T THE E GA GAP B P BETWEE TWEEN N DESIGN A SIGN AND D PR PRODUCT ODUCTION PR ON PROCESS T OCESS TO MAKE E THE T E TRADITIO ADITIONAL NAL BIDDING M DDING MODE DEL L L LESS D SS DYSFUNCTIONA SFUNCTIONAL

Re Reliance up upon int international desig design a and engi gineeri eering g cons nsul ulta tant nts t s to pr prod

• duce

uce wor workable le designs gns Lack o

• f inte

tegra gration Clo Clouds of

• f

un uncertainty Low pr Low prof

• fit

it marg margin ins s int internationally in in pr prod

• duct

uction Hi Higher c clie lient nt expe expect ctatio ions ns Shorta tage of

• f skills

ills BIDDING Mor More r risk sk More c e compl mplexit xity Illusi sion

• ns o

s of certain ainty

The conf The conflict in biddin in bidding is between is between clou clouds ds of unce

• f uncerta

tainty ty and illu and illusi sions of cert

• f certaint

nty To Top g p global co cont ntractors – – rev evenue and profit and profit mar margin befor before tax tax

(Billion USD) ACS Bouygues Vinci Skanska Strabag Ferrovial Hyundai Shimizu CSCEC CCCC (China) (China) (Japan) (S.Korea) (Spain) (Austria) (Sweden) (France) (France) (Spain) Revenue Profitability

Construction Division

International Revs. 2016 Domestic Revs. 2016 Net income margin 2015 (% on Revs.) Net income margin 2016 (% on Revs.) 16 % 84 % 6.5 34.6 45 % 55 % 6.6 18.5 8.3 41 % 59 % 58 % 9.9 7.1 42%

(Nordic) 10.4 84 % 16 % 2.3 9.6 76 % 24 % 3.0 8.5 52 % 48 % 12.4 89 % 1.6 11 % 122. 7 93 % 7% 9.2 11.3 83 % 17 % 53.4 2.05 % 2.3% 2.91 % 2.76 % 5.31 % 6.57 % 3.13 % 3.94 % 1.38 % 2.27 % 5.94 % 5.72 % 1.92 % 2.61 % 2.13 % 3.56 % 2.82 % 2.85 % 3.92 % 4.00 %

(so (source: e: annual annual report and and ac accounts)

Such Such low low marg margin ins are not are not sust sustai ainabl ble in t in the e long long term rm

SLIDE 10

EIC meeting Vienna 20th April 2018 ‐ Roger Flanagan April 2018

We We ne need ed to to f fill the ill the gap p at at the bid the bid stage stage bet between desi design gn and and prod production

• n,

, with th new new appr approaches and and a mor a more syst systemised appr approa

• ach to

towa wards esti estimating Trea Treat the the bid phas bid phase as as the mo the most impor important part part

• f the

the w whole pr

• le proc
• cess

ess

Too little time allowed for bidding Unreliable information of variable quality Cost of bidding is increasing Loss of deep knowledge base in estimating Greater reliance upon specialty contractors Design Bid Production The risks are increasing and the risk allocation is causing problems Expensive bid submissions on large projects including simulations

PROPOSITION OSITION 3 3 COMPETING ETING ON A LEVEL P L PLAYING ING F FIELD

This is how we are all playing at the moment in the developing world Even the developed world pitch is getting bumpier We need ed t to think a about h how w we comp mpet ete i e in t the d e dynamic mic a and d chan angin ging m market

• et. T

There n need eds t s to be a level p l playin ing f g fiel eld w d with a a ne new rul rule b book f for d r deli livery

Quali Quality Social r al responsib

• nsibilit

ility Environ Environmen ental res respon

• nsibili

lity Ethic Ethics and and complia liance nce Safet Safety and healt and health Code Code of

• f be

behav haviour for for int interi rim and and final l paymen ents, r , retent ntion p ion payments, and final a l accoun unt s t settlem ement ent Looking a g after the ter the custom

• mer

er Managi Managing ng and pro and protecti ting infor informat ation and and dat data