A Review of the All Island Construction Sector

Published: June 2003

EXECUTIVE SUMMARY

The construction industry is an important contributor to the economies on the island; has performed strongly in recent years due to increased business attractiveness, confidence in the private sector, and an injection of government investment in infrastructure and public sector work.

In 2001, it generated over £14/ €20 billion in Ireland and almost £2.8/ €4 billion in Northern Ireland. Although growth was evident in both sectors over the last decade, the pace of expansion has been much greater in the South, where output grew at an average of 35 per cent per annum
between 1996 and 2000, compared to 9 per cent in Northern Ireland over the same period. Construction accounts for 16 per cent of Gross Domestic Product (GDP) and for 14 per cent of total employment in the South of Ireland. The North lags some way behind, at 6 per cent and 5 per cent respectively - evidence of the scope for development.

The pace of growth in the construction sector mirrors the strong performance of both economies. Between 1996 and 2000 GDP in the South grew by an average of 9.4 per cent per annum, while GDP in the North grew by 2.4 per cent per annum. In spite of a slowdown in the pace of GDP growth in the South, the economy remains one of the top performers in Europe. The economy in the North is set to continue to develop as well, with further investment expected in infrastructure and housing in particular.

Although this regional economic development has brought about significant opportunities and growth amongst the local companies involved in construction, they are at the same time challenged in meeting the operational and financial requirements that would enable them to
capitalise fully and finance these market opportunities. 

Despite sharing some common features and issues, the industry is operating on different platforms within the two jurisdictions and they cannot be treated as a homogeneous market due
to legislative and cultural differences. The platform for cross-border trade in the short term is further affected by the downturn in economic prospects (and consequently the construction prospects), which means that companies are more competitive and protective of their own ‘patch’ and less open to collaboration.

The outlook in the medium to long term is more promising, as the local and international economies are expected to recover and business confidence to improve. This outlook, along with the similarities and common issues pertaining to the two construction sectors detailed below, could prepare the ground for potential joint cooperation and initiatives, which would aid development of cross-border trade and the performance of the sector in each jurisdiction:

• Similar building regulations, further enhanced by European Union (EU) standardisation;
• Same climate and language;
• Geographical proximity;
• Fragmented structure, with a limited number of large players and predominantly small- and medium-sized enterprises (SMEs);
• Relatively limited strategic approach to business development and management of customer relationships, as customers increasingly require improved reliability and more highly skilled staff;
• Need for better uptake of training and a long-term commitment to development;
• The need to adapt to new trends regarding the handling of Public Private Partnership (PPP) contracts, integrated project teams and information systems, adoption of best practice and off-site fabrication, etc.;
• Highly regulated and inflexible public procurement;
• Increasingly competitive environment, as Great Britain (GB) and other foreign companies become attracted to the island market; and
• Relatively low levels of innovation and research and development, which may affect competitive advantage.

It should not be ignored that PPPs have enjoyed a mixed reception in the North and South and have been subject to considerable criticism. Some early PPP projects on the island have experienced similar problems to those in other countries, these include protracted procurement
timescales, difficulties in resourcing project teams, and relatively high transaction costs. 

The pool of bidders for PPP projects is affected by the reluctance amongst smaller companies to participate in tendering processes, as well as the relatively small number of companies that have the critical mass and expertise to act as prime or lead contractors. As larger companies become involved in one or two PPP projects, they are not able to respond to subsequent tenders. This may delay the implementation of high priority developments and/or open the door to direct competition from overseas contractors.

However, PPP projects, through their scale and expertise requirements, have the potential to bring about North/South cooperation (particularly given the current situation, as detailed in Chapter II) bridging possible gaps in capacity and, more importantly, sectoral expertise. In summary, despite sharing a number of similarities, the different market conditions in the Northern and Southern construction sectors have created an imbalance in the level of cross-border trade.

The sheer size of the market in the South, along with higher-margin work coupled with an under-capacity in supply, has encouraged Northern contractors to seek work there.

Industry support organisations tend to have an insular focus, with little support available to help
develop external markets in either jurisdiction. This reflects the short-term needs of their clients. However, there has been some cross-border cooperation leading to the mutual recognition of health and safety training, under the ‘Safe T Cert’ scheme operated by the Construction Industry Federation (CIF) and Construction Employers’ Federation (CEF). The availability of larger-scale
projects would help drive increased cooperation across the sector.

The industry is going through a period of unprecedented change on the client and supply side,
primarily through many types of government initiatives to boost the effectiveness and efficiency of the industry as a whole. Key issues for improving construction performance are:

• Partnering, integrated construction teams and supply chains;
• Procurement (non-traditional) and e-tendering;
• Project management and project information systems;
• Quality- and client-focus and management; and
• Training and people development, and the introduction of overall best practice.

Any cut in public sector investment will rebound on employment and will diminish the ability to deliver a modern infrastructure, so necessary to develop inward investment and indigenous growth in Ireland, North and South. Although there is a potential levelling-off of demand in the short term, this is against a much higher level of activity than historically has been the case. 

The report makes a number of recommendations which have been divided into two groups:

Recommendations for the private sector:

• Construction enterprises should be encouraged to adopt a proactive approach to business planning;
• The industry needs to improve its internal business efficiencies, particularly in the areas of project management, supply chain management, and management information systems;
• A mutual recognition of qualifications and training programmes would help organisations operate more fully on an all-island basis; and
• Expansion of the Northern Ireland Construction Best Practice Club to an all-island basis would enable a wider exchange of information and allow benchmarking against a larger pool of equivalent businesses.

Recommendations for the public sector:

• Better communication of government policy and committed spending plans for the medium term would allow businesses to commit to investment for the future and rationalise where necessary;
• The PPP process needs to be improved to reduce the cost and time involved at the bid preparation stage;
• Delivery of a ‘masterclass’ in the approach to, and preparation of, PPP submissions would help remove some of the current misunderstandings and misinformation surrounding the PPP process;
• Although Construction online is a relatively recent introduction to the North, the potential for extending the initiative exists and would help facilitate cross-border trade;
• In order to improve innovation on the island it has been proposed that a construction innovation centre is established. The scope of the proposal could be extended to establish a cross-border centre for innovation in construction;
• Improving quality standards (both in building techniques and construction materials) would enhance the local companies’ competitive advantage in the face of increased presence of GB and foreign contractors in the market;
• Joint cooperation at industry level would mean that future efforts made towards the development of local and European Union (EU) standards are not duplicated but carried out in a strategic and coordinated manner; and
• A cross-border forum, bringing together representatives from key players in the industry (large and small), government and academic sectors would enable the establishment of relationships, facilitate the exchange of information and experience, and help further co-operation on joint industry training, skills and standards.