Global E&C Scene – Risks and OpportunitiesGeorge J. Pierson – CEO, Parsons Brinckerhoff

15 June 2011

Agenda

• Risks & opportunities in the E&C market

• Keys to success

• Q&A

Risks & opportunities in the E&C market

Scope of today’s discussion

• This presentation focuses on the Infrastructure market– Civil Infrastructure (e.g. Transport, Power, Water)

– Social Infrastructure (e.g. Health, Education, Other Government

buildings)

– This excludes: Other Non-residential Building (e.g. Commercial);

Residential Building; Oil & Gas

• We will consider Infrastructure in the context of Developed

and Developing Economies, as well as particular

sectors

Risks & opportunities in the E&C marketDeveloped economies

Developing economies

Sector hotspots

Developed economies have seen an up-tick in infrastructure investment since 2000

• In developed economies Infrastructure spend

is driven by renewals of aging assets, capacity

constraints and environmental factors

Infrastructure Investment as a % of GDP

Source: ONS, US Census Bureau, Statistics Canada

In future, public sector deficits will affect infrastructure spend in developed markets

General Government Gross Debt as a % GDP

Source: IMF

• Large deficits will constrain public capital spending on

infrastructure in many developed markets, including the

U.S. and UK

0

20

40

60

80

100

120

140

160

% G

DP Developing

economies

Developed economies

Impact of Government spending cuts: Example 1, UK Health & Education

• Health & Education spending in the UK is forecast to fall

significantly from the heights of the late 2000s (although

it will remain well above historic levels)

Source: ONS, CSR

Impact of Government spending cuts: Example 2, US Transportation

• Project flat or potentially

reduced federal transportation

spending for at least two years

and potentially six, until

reauthorization

• Reauthorization likely to remain

stalled until after 2012

presidential election

• House Republicans support

drastic reduction of federal

involvement in decisions for

transportation projects; focus on

―devolution to the states‖

1998 2003

2013? (current proposals)

$218B

6 Yrs.

$286.5B

6 Yrs.

$600B

$500B

$400B

$300B

$200B

$100B

$0

$230B

6 Yrs.

$339B

6 Yrs.

$556B

6 Yrs.

House Senate Obama

Actual funding bill Proposed funding bill

Public spending constraints will drive private financing opportunities

PPPs are an established

method of infrastructure

delivery in Europe…

…and a nascent but fast

growing part of the US

market

PPP Investment in Europe PPP Investment in US Transport

Source: “Public-Private Partnerships to Revamp U.S. Infrastructure” (Feb. 2011) Brookings Institute (Hamilton Project)

Public spending constraints will drive private financing opportunities [Cont’d]

• A large pipeline of projects already exists

• Others will be added to this pipeline

Funded PPPs since 1985 and planned PPPs

-

100

200

300

400

500

600

700

Pro

ject

Val

ue

, US$

bn

Planned projects

Funded projects since 1985

Source: “International Survey of Public-Private Partnerships” (Oct. 2010) Public Works Financing

Economic challenges will also encourage other procurement trends to continue

• Alternative contracts types have increased, and will

continue to do so, as customers seek value engineering

advantages from Design-Build/ ECI/ EPCM etc.

1Based on survey of 70 DBIA conference attendees

Source: DBIA; “State of Design-Build” by Mortenson Construction (Dec. 2010)

0

10

20

30

40

50

60

70

80

2005 2006 2007 2008 2009 2010

% M

arke

t sh

are

Contract type for US Non-Residential

Construction

Impact of recent economic challenges

on use of Design-Build1

6%

27%

67%

Design-Bid-Build

Design-Build

CM at risk

“Design build popularity

has decreased relative

to other methods”

“Design build

popularity has

remained fairly

stable”

“Design build has

grown in popularity

relative to other

methods”

Services will become an increasingly important part of the E&C market

A Growth Market

• Outsourcing O&M reduces

costs for infrastructure

owners

• Higher levels of

outsourcing can result in

growing markets even

when total spend is

decreasing

– Local Authorities are seen

as an opportunity for service

firms in the UK despite

significant budget cuts

Increasingly linked to E&C

• Contract structures

increasingly include O&M

services

– PPP, DBOM

• Customers seek

infrastructure solutions

that account for total

lifecycle costs in the initial

design and construction

– Energy management

Environmental drivers will also have a positive impact on developed markets

Impacts

• Renewable Power

generation

• Upgrades to existing

generation plants

• Energy management

• Sustainable buildings

• Construction techniques

Drivers

• Carbon commitments

• Increasing adoption of

environmentally friendly

behaviours

• Rising fuel costs

Risks & opportunities in the E&C marketDeveloped economies

Developing economies

Sector hotspots

Developing economies have huge infrastructure requirements

• The global infrastructure market is expected to be $30+

trillion over 2010-20

• A large portion of this in developing countries, driven by

population growth, urbanisation and increasing GDP/ head

10.516.0

4.8

8.8

3.2

2.4

3.5%

12.5%

4.0%

14.0%

9.5%

Market size over 2010-20, $trillion Growth p.a.

Source: Global Insight

However, this opportunity is often in areas with difficult operating conditions

Source: Transparency International

• Corruption and Health and Safety issues are challenges

in many developing markets

Questions have recently been raised about China, but long term drivers remain strong

• Potentially significant

knock-on effects in

China and ROW

• But long term growth

drivers remain strong

– Population growth

– Rapid urbanisation

– Government ability

to influence the

economy

• Slowdown in house prices is

the result of the Government’s

Home Purchasing Restriction

(HPR) policy to temper an

over-heating residential

market

The Great Property Bubble Of China May Be Popping

―BEIJING — After years of housing

prices gone wild, China's property

bubble is starting to deflate…..‖

Wall Street Journal, June 9th

Customer procurement capacity is both a risk and opportunity in many countries

• Lack of capacity within

Governments for procuring

capital projects is a

common problem in

developing economies

– South Africa, Brazil

• A potential opportunity for:

– Greater outsourcing of

engineering resource

– Procurement advisory

services

– New contracting methods

(including PPP)

• “The government’s infrastructure

investment plans are encouraging.

However, the awarding of contracts

has slowed with very few material

awards during the 2010.’

Aveng Annual Report 2010

• “There is a realisation that the

government doesn’t have the

capacity to deliver all the projects

it needs to.”

South Africa PPP Unit

Recent Comments on South Africa

Construction Market

Risks & opportunities in the E&C marketDeveloped economies

Developing economies

Sector hotspots

Sector hotspots: Power & Water

Power

• Opportunities in:

– Generation (thermal)

– Generation (renewables)

– Transmission

• Driven by:

– Aging infrastructure and

environmental factors in

developed economies

– Capacity issues in

emerging markets

Water

• Opportunities in:

– Water and Waste Water

Treatment

– Desalination plants

• Driven by:

– Environmental factors in

developed economies

– Capacity issues in

emerging markets

• Corruption issues

Sector hotspots: Mining & Rail

Rail

• Opportunities in:

– Urban rail

– High speed rail

– Freight

• Driven by:

– Urbanisation

– Environmental issues

– Economic recovery

– Commodities• Opportunities in Oceania,

South America, Africa

• Commodity driven (India and

China)

Mining

-

20

40

60

2006 2007 2008 2009 2010F 2011F 2012F

Av. annual

growth

17%

Av. annual

growth

16%

Forecast

1Anglo American, Xstrata, Rio Tinto, Vale, BHP

60

40

20

2006 2009 2012

$bn Capex of major mining firms1

Keys to success

An overview of key success factors

Success Factors

Technical expertise

Local knowledge

Market selection

Financial strength

Lifecycle services

A full lifecycle offer will allow firms to capitalise on procurement trends

Summary

Risks

• Public sector

spend constraints

in developed

markets

• Corruption & H&S

in developing

markets

• Reliance on

China

• Lack of

procurement

capacity in

developing

markets

Opportunities

• Private financing

• Contract innovation

• Services

• Environmental

drivers

• Infrastructure needs

in developing

markets

• Lack of

procurement

capacity in

developing markets

• Sector hotspots

Keys to success

• Technical expertise

• Local knowledge

• Market selection

• Financial strength

• Lifecycle services

A closing thought…

• “For every problem there is

an opportunity.”

Anon

• “A pessimist sees the

difficulty in every

opportunity; an optimist

sees the opportunity in

every difficulty.”

Sir Winston Churchill

Thank You/ Q&A