Here’s what Govt needs to do to give building sector best shot at survival

1586521329244OPINION: The impact of Covid-19 is incalculable. The immediate impact on physical and psychological health is immense.

Governmental planning has been driven by modelling that predicts mass infections and substantial mortality. Not unreasonably the New Zealand government instituted a countrywide lockdown. The effect has been monumental. Movements stopped, businesses closed, all bets are off.

It is too soon to say whether we are through the worst of it. What can be said is we need to plan for “the morning after”. At some point we need to get back to work, otherwise inevitable recession could metastasise into depression.

Construction is the commercial canary in the economic coal mine. First to tip into decline in a downturn. First to show green shoots of recovery. The reason for this is the industry is driven by cashflow volume rather than percentage earnings. Builders have low reserves and run out of cash quickly in a downturn. But new construction can start relatively quickly with financial resource availability.

“Nice to have” projects, such as Skypath, may have to be put lower on the priority list. Economists and politicians recognise we build our way out of recession. In the decade since the GFC, we have seen continuous sectoral growth. Yet it has taken all those ten years to grow a housing sector that is still yet to match housing demand. Recently we have seen feelers from Government via Mark Binns at Crown Infrastructure Partners (CIP). The request was for “shovel ready” projects Government could potentially invest in as economic stimulus for construction and the wider economy.

However describing projects as “shovel ready” tends to imply a relationship to dirt, clay, excavation and civil engineering type projects – i.e. horizontal infrastructure. Whilst infrastructure investment is generally laudable, this may have relatively limited economic benefit in the current situation.

Infrastructure isn’t synonymous with the entire construction sector. It is one part of an industry comprising three distinct subsectors – horizontal (roads, water etc), vertical (commercial and multi-storey) and residential (housing). The skills and trades in each subsector do not move between them. Residential uses much more labour; horizontal construction much more plant machinery. Vertical construction is somewhere between the two. Horizontal constructors particularly have skills with limited application elsewhere.

If the intention of Government is to restart the economy, focussing only in horizontal construction would be a missed opportunity. Post-pandemic planning for construction should be focussed on maximising employment across the country. In terms of labour utilisation, residential and vertical constructions use vastly more tradies and subcontractors to deliver their outcomes compared to horizontal construction. Typically up to 50 per cent of all expenditures on a vertical or residential project is in the form of direct labour. Materials and other services have further labour costs associated.

Money going into the hands of tradespeople starts immediately at commencement of projects rather than filtering through later. By contrast horizontal construction has typical labour values of 25 per cent to 30 per cent. Stimulus investment in vertical or residential construction can potentially have twice the employment bang per stimulus buck. We need to think beyond “shovel ready” towards “workforce ready”.

Government needs to take balanced investment approach across the three subsectors if employment is a key focus. Identifying and funding vertical and residential projects we can leverage to rapidly mobilise employment opportunities is essential. This implies we may need to defer “nice to have” projects, such as Skypath and light rail, in favour of health, education and social housing investments.

We should be considering the asset condition of health and education infrastructure across New Zealand. All Governments like to make marks by building impressive new buildings. Regrettably they have all neglected prudent asset management as equally essential to the health of the nation. Estimates put the current health capital building programme at $10 billion to $14b. Countrywide backlog maintenance is $4b to $5b.

The well-publicised poor condition of Counties Manukau health facilities is symptomatic. Similarly backlog maintenance for education from preschool to tertiary is likely of comparable magnitude.

Maintenance backlogs could be unleashed immediately when buttons were pressed. Tradies and SMEs would respond without delay. Better yet, most work won’t be tied up with RMA and consenting. “Shovel ready” infrastructure projects are undoubtedly central to post pandemic planning. However they should be seen as part of a wider tapestry of options. Keeping tradies busy now on backlog maintenance of public sector assets would provide a resilient resource that could be transferred to the private sector after recovery.

We’re in the jaws of a systemic crisis. We need to build our way out through targeted investment. Silver bullet infrastructure spends need to be tempered. We need to retain key skills, maximise employment outcomes and enhance resilience in critical assets. Starkly put – Government should decide whether its policy is to maintain construction employment or construction machines.

Dr John Tookey is professor of construction, director of Centre for Urban Built Environment (CUBE-NZ) at AUT University and Dr Tony Lanigan MNZM is director major projects – estates group at AUT, distinguished fellow of Engineering NZ, former director of Infrastructure Auckland, NZTA and Watercare, director (and former chair) of NZ Housing Foundation and a member of the Ministry of Health’s governance group for Christchurch Hospitals’ redevelopment.

Source: Stuff.co.nz

Weight is lifting from the NZ economy

Akl_CBD_colin_620x310The New Zealand economy is predicted to grow despite a dip in dairy prices.

New Zealand business leaders are relishing the prospect of operating in a benign, stable and growing economy for the first time this decade.

This recovery has only just begun. Yes, we’re already talking about a dip in the rate of growth as dairy prices fall, but forecasts for an extended period of moderate growth remain.

After running lean for about five years in the wake of the financial crisis, many businesses are now pushing forward with the kind of growth and transformation strategies they need to meet a rapidly changing market.

Take a look at some of the big results in this year’s Mood of the Boardroom survey. They all point to a more optimistic, more exciting outlook from the top of the business world. More than three quarters of respondents expect revenue to grow in the next 12 months. Nearly 60 per cent expect to increase staffing levels. Just 13 per cent expect to contract. And more than half expect to authorise more spending on capital expenditure.

Most businesses face more than enough challenges thanks to the disruptive influence of technology.Which is why the global financial crisis, and defensive stance businesses were forced to take in response to it, was such a drag – not just for workers but for managers, executives and all the way to the boardroom.

When it comes to structural challenges media get all the attention, but from retailing to manufacturing there aren’t many parts of the economy untouched by the internet revolution.

Companies have to evolve constantly and position themselves to respond to cultural trends that move at a breakneck speed. Business leadership needs to be dynamic and bold – now more than ever.

That shouldn’t be something to fear. It is exciting and challenging, without the grim weight of economic doom hanging over the world.

Take a look at the big strategic challenges business leaders are highlighting this year. Managing talent gets the most focus, followed by optimising digital structure and then addressing organisational structure third.

Addressing capital structure is highlighted as a major strategic challenge by just 30 per cent of respondents and dealing with risk management by less than half. That is a very good sign. Suddenly it is starting to feel like a weight is lifting.

Of course, this does not signal a return to the rampant borrow and spend days of the pre-GFC boom.

After several years of stagnation, there is still caution and risk aversion. We’re going to need a steady and sustained period of growth to make the corporate changes New Zealand needs.

And that is one of the reasons that business leaders are reluctant to see political change right now.

Stability feels good to business at the moment, and the incumbent political party naturally has that on its side. In this kind of environment the onus is on the Opposition to convince voters it will not derail the recovery.

It is clear from this survey that, despite some policies many in the business world have some sympathy for, David Cunliffe and the Labour Party have not got business on side.

This year the Opposition parties are up against a compelling economic narrative. One that even the allegations and controversy of the past few weeks has not blunted.

At the other end of the political spectrum even the Act Party seems to face this problem, with the appetite for free-market reform far from what it was through the 1980s and 1990s.

New Zealand business has just been through the toughest cyclical downturn in generation.

It is running lean and fitter for the experience.

Our corporate leaders aren’t looking for radical polices. They are backing themselves to perform in benign conditions. They are looking for a Government that doesn’t get in their way. But they are open to a Government which has a vested interest in developing industry for New Zealand’s benefit.

Those on the right have attacked National for veering into the realms of corporate welfare. This is not a Government that is shy of picking winners and supporting business sectors New Zealanders want to see grow.

It is, in the end, a more pragmatic and centrist formula than many expected from a party that is led by a global currency trader.

But it is one that seems to sit well with those in our leading corporate boardrooms.

Source:

  • Liam Dann
  • NZ Herald

Construction part of major NZ growth

New Zealand is on the cusp of its best year for economic growth in 10 years, says UBS NZ chief economist Robin Clements.

Clements expects growth in gross domestic product (GDP) to be 3.6 per cent in calendar 2014 compared with 2.7 per cent in the June 2013 year and 2.5 per cent in calendar 2012.

“I’m picking next year to be the best growth for a decade and for the next two years to be above average,” Clements said. “We may not make it to the heady, Asian-like growth rates, but it does suggest that there is faster, accelerating growth ahead.”

decade

Clements said that while the country experienced higher growth, world inflation was expected to remain low.

At home, the main drivers for growth would be “construction centric” – with about 1 per cent of the forecast coming from rebuilding activity in Christchurch.

Firm commodities prices would also be supportive, and business and consumer confidence surveys had also shown big improvements, Clements said.

If stronger growth comes to pass, he said the economy would become tighter from the Reserve Bank’s point of view, bringing with it issues of wage-price pressures, house price inflation and the need to raise rates.

He expected the Reserve Bank to start raising rates from March, and for the official cash rate to be 4 per cent by the end of 2014, hitting 4.5 per cent a year later.

UBS expects the US Federal Reserve to start to taper, or wind back, its US$85 billion a month bond repurchase programme by January next year.

If that happens, Clements expects the US/NZ exchange rate to shift down to a US75c-80c range from the current US80-85c range, but for the relative strength of the local economy against the Australian economy to show through in the Aussie dollar cross rate appreciating to a A90c to A95c range from the current A85c-A90c range.

Source:

  • NZ Herald
  • Jamie Gray
  • Photo: Mark Mitchell
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