ENR's 2014 Top International Contractors

Large international contractors are finding an abundance of work in the global market. However, competition is ramping up, and, in many cases, financing can be a problem, forcing even the largest and most sophisticated contractors to be nimble in squeezing out the most value from their processes.

On the ENR Top 250 International Contractors list, firms are ranked based on contracting revenue from projects outside of their home countries, measuring their presence in international commerce. ENR's Top 250 Global Contractors list ranks contractors based on total worldwide contracting revenue, regardless of the projects' locations.

The ENR Top 250 International Contractors had $543.97 billion in contracting revenue in 2013 from projects outside their home countries, up 6.4% from $511.05 billion in 2012. The Top 250, as a group, also had $871.50 billion in revenue from domestic projects in 2013, up 7.1% from $813.55 billion in 2012.

Interestingly, 56% of the Top 250's total domestic contracting revenue came from Chinese contractors, which are benefiting from China's huge infrastructure and rail program. Further, China's economy may be moderating somewhat, but its industrial and buildings sectors are still vigorous. Three Chinese contractors—China State Construction Engineering Corp., China Railway Construction Corp. Ltd. and China Railway Group Ltd.—each are approaching $100 billion in total contracting revenue.

On a regional basis, Canada continued to be the big winner, growing 24.4%, to $27.49 billion, in 2013 contracting among the Top 250. International contracting revenue also was up 19.9% in central and southern Africa, 14.6% in Latin America, 9.7% in the U.S., 9% in Europe, and 5.7% in Asia and Australia.

Surprisingly, contracting revenue for the Top 250 contractors was off by 7.7% in the Middle East. Less surprising was that international revenue fell by 6.5% in strife-torn northern Africa.

‘Extremely Fierce’

Looking at the international scene overall, "we have a very positive view of the markets," says Johan Karlström, chairman and CEO of Sweden-based Skanska AB. Markets outside Europe "can represent excellent opportunities and prospects for growth, particularly in Asia and North America, although in some regions competition is extremely fierce," adds Yves Gabriel, CEO of Paris-based Bouygues Construction SA.

With over half its sales in France, VINCI Construction SA aims to increase international operations, says Jérôme Stubler, who recently became CEO. His goal "is to develop networks of subsidiaries, headed by local managers, that are able to carry out projects on a general contracting basis, often as an extension of specialist activities already present or major projects already carried out in these markets."

Germany's Bilfinger (formerly Bilfinger+Berger) has put its construction units on the block. With civil engineering sales down 75% since 2008, Bilfinger lacks needed critical mass for international work, Chairman Roland Koch said three months ago. He recently quit after issuing two profit warnings in quick succession.

Under the temporary chairmanship of Herbert Bodner, Bilfinger likely will continue exiting from international construction to focus on engineering and services. Preferring to sell the contracting business as a unit, Bilfinger expects a deal within a year.

U.K.-based Balfour Beatty plc is also in flux. After making its own U.K. profit warnings this May, the firm ditched CEO Andrew McNaughton, who has yet to be replaced. Then, merger negotiations with U.K. contractor Carillion plc over the past month floundered as the firms disagreed over Balfour Beatty's U.S.-based design unit Parson Brinckerhoff Inc. Balfour is set on selling PB to reduce debt, while Carillion wants to hold on to the design firm's revenues.

With a merger off the table, Balfour Beatty now "will be refocused as an Anglo-American construction and specialist services group," the directors say in a statement. While continuing in East Asia and the Middle East, the firm's operations will be simplified and its risk profile improved.

Collapses

Several large international contractors failed over the past year. In June 2013, Alpine Bau, Austria's second-largest contractor, filed for insolvency under the weight of massive debt. Fellow Austrian contractor PORR AG acquired the Austrian and German offices of Alpine, and Turkey's Renaissance Construction acquired Alpine's Swiss subsidiary.

E. Pihl & Son declared bankruptcy in August 2013 after 124 years in business. Pihl, one of Denmark's largest contractors, ranked No. 154 on last year's Top 250 list. It cited as reasons for its bankruptcy overly aggressive international expansion and greater-than-expected losses on some foreign projects.

Lakeshore TolTest Corp., Detroit, which ranked at No. 144 on last year's Top 250 International Contractors list, collapsed this past April. The firm reportedly fired 79 overseas employees and 135 subcontractors by email, stranding the terminated employees in Afghanistan and forcing them to use credit cards and petty cash to get home (ENR 7/29 p. 16).

The global market is growing, but contractors are facing increased pressure from clients to deliver projects more economically. "Clients, globally, have become increasingly cost-conscious," says Atul Punj, chairman of India's Punj Lloyd. He says the key to success is technology. His firm has been able to succeed by providing value engineering and economically viable solutions at the outset of projects, he says.

"The contracting industry keeps getting more competitive and profit margins keep shrinking, mainly driven by changing procurement policies," says M. Sani Sener, CEO of Turkey's TAV Airports Holding. "In today's environment, firms have to be technically competent as well as being commercially competitive. No company can afford to charge a premium based on purely technical advantages," he says.

Further, Sener says many clients are increasing the use of alternate funding methods. "Public-private partnerships and various versions of [build-operate-transfer, or BOT] schemes are getting increasingly popular, especially for large infrastructure projects, as the cost of funding for such projects increases," he says. Many transportation projects in the Middle East are being financed through P3s and BOTs, he notes.

While Balfour Beatty struggles to make money in its home market, foreign contractors increasingly are attracted by British prospects. VINCI's Stubler reports 8.3% growth last year in the U.K., which is the firm's "most important market outside France." For Bouygues, the U.K. is also one of its largest non-French European markets, says Gabriel.

After its painful recession, the U.K. is "maybe the market where we see the biggest shift," says Karlström. "We have doubled our order intake in the first half [of 2014] compared to last year," he adds.

Bechtel's largest U.K. project, the London Crossrail, is more than half done, but there is "still a lot of interest on the part of our clients in further investment," says David Welch, the firm's president for Europe, the Middle East and Africa. Huge investments in railroad and airports are in the offing, he adds.

French construction has been buoyed by residential investment in the Paris region, where there is "considerable potential for major infrastructure projects," says Gabriel. But apart from some megaprojects, such as the Tours-Bordeaux high-speed railroad, the current French market is generally flat, Stubler counters.

As western Europe's hottest market, Sweden has attracted many international players, says Karlström. There seems to be enough work to go around, although the outcome of this September's general election could affect spending, he adds.

Germany's Spanish-controlled Hochtief AG continues major restructuring of its European operations. "We … are going to further optimize our processes, [such as] in the area of project and risk management," notes CEO Marcelino Fernandez. To focus on building and infrastructure, the firm has sold its airports and services divisions and is getting out of real estate.

Despite concerns over Europe's sluggish market, Turkey's Renaissance Construction is making a major push into western Europe. In addition to acquiring Alpine Bau's operations in Switzerland, it acquired a 75% stake in Germany's Heitkamp Ingenieur und Kraftwerksbau. "The target is to become more competitive, particularly on infrastructure projects," says Ugur Koyunoglu, chairman of Renaissance. He says Renaissance's acquisitions allow it to combine traditional European know-how with the flexibility of a contractor used to working in emerging markets.

In Eastern Europe, VINCI subsidiaries in Poland, the Czech Republic and Slovakia face a "sharp downturn in their construction markets," says Stubler. But they "maintain their overall operating margins" by diversifying into "more buoyant" sectors, he observes.

However, Karlström speaks positively about Poland, which is attracting increasing international investment and EU funding, he says. "The underlying economy is very, very strong," he adds.

In the Balkans, Bechtel plans to build on its "strong record" of motorway construction, says Welch. As the area is "grossly underserved with infrastructure," he sees potential for more such projects following last month's win of a contract for a 60-kilometer highway between Kosovo's capital, Pristina, and the Macedonian border.

Conflicts

The conflict in the Ukraine has some firms wary. Koyunoglu of Renaissance worries that increased tension in the Ukraine, among other volatile regions, may spread and dampen investment opportunities there and in Russia. However, he is optimistic about the mid- and long-term prospects in Russia and the Commonwealth of Independent States (CIS) countries.

Regional conflicts also may play havoc with bids. "The recent turmoil in Iraq, Nigeria and Russia can critically hamper the world supply of oil and gas," says Punj. "Because of globalization, any disruption of the supply chain is bound to impact economies globally."

But some firms continue to see a big market in Russia. "The construction market will continue to rise and expand in Russia and the CIS countries. In particular, Turkmenistan is the rising star," says Mehmet Okay, board member at Ant Yapi, Turkey. To work in CIS countries, he says, it is critical to bring technical expertise and employ local resources.

For Bechtel, the Gulf region "is now a geographic hub for business," says Welch. Last year, he moved Bechtel's Europe, Middle East and Africa headquarters to Dubai from London. There, he says, he can reach 80% of the world's population within eight hours.

The Middle East itself is an important market as governments step up investment in education, housing, health and other social infrastructure projects, says Welch. Bechtel now is gathering up its team for its multibillion-dollar contract to build and equip two lines on Riyadh's new metro. It is the "largest single job we have on the planet," he adds.

"We believe the Arabian Gulf region currently provides some of the greatest opportunities for the construction market," says Sener of TAV. He says most Gulf countries have the money and the vision to transition their economies away from a dependence on oil.

For Bouygues, Qatar "is still our principal location in the Middle East," according to Gabriel. "We are tendering for quite a lot of contracts at the moment, but we face strong competition."

Hochtief operates in the Middle East under both its own name and through its Australian subsidiary, Leighton Group. "Both companies have good networks and stable customer relationships in countries [such as] Qatar, Dubai, Abu Dhabi and Saudi Arabia," explains Fernandez.

Having completed underground construction on Lusail's light-rail system in Qatar, VINCI has won substantial civil work on the metro and new Orbital Highways in Doha, adds Stubler.

Africa continues to attract international contractors. "We've got a corporate focus on Africa," says Welch. Bechtel is planning to develop "a robust portfolio" over the next five years; it opened an office in Mozambique last year, and it is supporting Gabon's government in developing a national infrastructure master plan and a major-project agency. African states "have a basket of needs but a limited capacity to take these needs and translate them to projects," says Welch.

VINCI generated over $2 billion in sales in Africa last year, mainly through its subsidiary Sogea-Satom. The roads, civil-engineering and hydraulics contractor recorded 18.5% growth in markets boosted by investment by governments, international institutions and the private sector, explains Stubler.

"West Africa is the land of opportunity nowadays," says Ashraf Rateb, board member and Africa-sector head for Egypt's Arab Contractors. He says the oil boom in Equatorial Guinea has been used to fund a building boom that has turned construction into the third-biggest element in the economy, after oil and gas.

Wealth from West Africa's natural resources is fueling enough construction to lure major European firms, Rateb says. But he claims The Arab Contractors have been in the region for decades and may be one of the only contractors in the region equipped to work in all market sectors, from housing to roads to powerplants.

The Lure of Asia

For Bouygues, "the strongest markets are in Asia," says Gabriel. Last year, Bouygues won its first contract in Myanmar, where it is now seeking to expand. "We are also building a luxury six-star hotel designed by [architect] Zaha Hadid in Macau," says Gabriel. Nearby, Hong Kong "remains very dynamic, particularly in the civil works," he adds.

VINCI subsidiaries are spread across East Asia on projects ranging from an airport renovation in Cambodia, metro work in Hong Kong and Kuala Lumpur and Singapore, buildings in Ho Chi Minh City and bridge structures in Macao.

Despite a fall in its minerals sector, Australia is "a high-potential market," says Gabriel. "We want to consolidate our presence there and develop a recurrent business." Bouygues is the preferred bidder for a 9-km highway tunnel north of Sydney and "is positioned for other major projects." However, since the Australian market is overcrowded with competitors, Punj says his firm is biding its time before entering.

Hochtief this year raised to nearly 70% from 59% its interest in Australia's Leighton Holdings because of the company's growth potential, according to Fernandez. He regards the shareholding "clearly as a core strategic investment." Just as Fernandez is restructuring Hochtief in Europe, he also is taking Leighton through a "major reorganization" to improve project delivery, strengthen its balance sheet and reduce debt, potentially through divestments.

Having lost money on three Latin American contracts, Skanska no longer will bid for construction there, says Karlström. "The opportunities for making money do not correspond to the risk profile." Instead, Skanska will concentrate on operations and maintenance work in the oil, gas and petrochemical sectors there.

By contrast, Bouygues is "gradually expanding our operations in Latin America," notes Gabriel. "We recently won our first contract in Peru, for the construction of a 135-meter-tall tower in Lima."

VINCI subsidiaries are active across the region with projects including the Panama Canal's Atlantic Bridge and a 9-km-long tunnel for one of the world's largest underground copper mines, in Chile.