“Status quo is Latin for the mess we’re in”

Simon Murray
27 May 2015

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We need new delivery models that enable all parties, including the many thousands of suppliers to the sector, to contribute fully to developing our infrastructure, says Simon Murray.

I was recently asked to speak to a meeting of infrastructure and construction people about the factors that shape the way we work together.  The structures of industries, their cultures and practices evolve over time in response to changes in technology, the economy and government policies.  To understand our relationships and the way we do things, we must first explore the journey that has brought us here.

Back in the 1960s the UK infrastructure sector was remarkably stable.  Most national infrastructure was owned by the Government or local authorities and operated by publicly owned companies like British Rail and the British Airports Authority.  These were robust organisations whose core competence was operating their infrastructure safely with the limited resources Government could to provide.  They funded their operations out of revenues but relied on Government to finance major projects.  They designed and led the projects themselves, appointing consultants and contractors to engineer and construct them.

"The consequences of these changes are that the processes for delivering infrastructure have become fragmented and the interests of the participants are no longer aligned." 

At that time engineering consultants were unlimited liability partnerships and were not allowed to advertise their services or compete with each other by offering lower fees.  Their partners’ personal wealth was at stake if anything went wrong, so they kept their firms to a size the partners could control.  The main contractors were substantial businesses that owned their plant and employed most of the skilled people they needed to plan and construct their projects.

By the 1970s this model for providing infrastructure was under pressure as Government could no longer finance the investment needed in the UK’s infrastructure out of taxes and borrowing.  In 1979 the new Conservative Government responded with a programme of privatisations that over the next decade would see most of our national infrastructure sold to investors.  To prevent the new infrastructure companies taking advantage of their positions as monopoly suppliers, the Government created economic regulators like Ofwat to set targets for their investments and control the charges they levied on their customers.

Regulation has not been without its problems but for the last thirty years it has provided the infrastructure companies and investors with a stable and challenging business environment.  After some rocky starts most companies brought in new management, restructured their businesses and focused on improving efficiency and customer service.  And their success in out-performing their regulatory targets has encouraged their owners to continue to invest in their assets.

Over the same period the construction industry faced a more difficult environment. 

In the 1980s the Government introduced tendering for consultancy appointments on publicly funded projects and the newly privatised infrastructure companies began to outsource their design and employ project managers to deliver their investment programmes.  At a time when the infrastructure sector was beginning to benefit from the stability of regulation, the construction industry was exposed to intensive competition based largely on offering low prices.

The infrastructure companies were not alone in driving down prices, but they have contributed to the reshaping of the construction industry.  In response to competition, consultants have consolidated into a few large international firms that sustain themselves by selling as many man-hours as possible to the infrastructure companies.  With one or two notable exceptions the contractors have responded by selling off their plant, shedding their labour and most of their engineering capabilities and reinventing themselves as project managers and traders in sub-contracts. Their margins are wafer thin and their cash flows are shrinking and under pressure from Government’s determination to get fair payment terms for their suppliers.

The consequences of these changes are that the processes for delivering infrastructure have become fragmented and the interests of the participants are no longer aligned.  As Paul Morrell put it in his recent report for the Edge Commission (Ref.2): “There is little or no integration between design, product manufacture, construction, operation and asset management…and no alignment of interests both within the supply chain and between the supply chain and the client”. 

Since the Latham and Egan reports were published in the 1990s there has been much fruitless discussion about the need to restructure the construction industry.  What has changed recently is growing recognition that the restructuring is not just desirable but essential.  The present arrangements are unsustainable for the infrastructure sector and the construction industry alike and are preventing us from providing the infrastructure the UK needs at a price we can afford.

A welcome development in the debate about change is the acceptance that restructuring will have to include the infrastructure and construction companies and the relationships between them.  We need new delivery models that enable all parties, including the many thousands of suppliers to the sector, to contribute fully to developing our infrastructure and benefit equally from our success.  The time has come to challenge the status quo and sort out the mess we’re in.

Simon Murray is director of the Acumen 7 network. www.acumen7.com

References

“Status quo, you know, is Latin for the mess we’re in” – Ronald Reagan

Collaboration for Change, The Edge Commission Report on the Future of Professionalism, Paul Morrell, May 2015.