Construction waits for renewed public spending

Renewed spending on public sector building projects by the re-elected Labour Government could give the UK's construction sector a much needed boost.

Renewed spending on public sector building projects by the re-elected Labour Government could give the UK's construction sector a much needed boost, according to the latest Industry Risk Analysis by credit insurer Atradius.

Atradius says that many construction companies are suffering because promised Government money for public works such as roads, schools and hospitals, has either been slow to materialise or has been put on hold.

The insurer believes the slowdown is the result of the Labour Government reigning in spending towards the end of last year so it would not be forced to put up taxes in 2005 during the run-up to the general election.

Now Labour has been re-elected it may have to raise taxes to pay for all the proposed public works.

Although this would be good news for construction companies working in the public sector, Atradius points out that higher taxes could have a negative impact on other parts of the industry such as house builders and commercial developers.

Will Clark, Atradius' Regional Director of the UK and Ireland, NAFTA and Australasia, says: "Public sector works were on target to account 45% of all construction work last year".

"In the end this figure fell and continues to fall in 2005".

"However, many businesses have geared up for the expectation of heavy workloads".

"If things do not pick up we could see some significant failures in the industry." In housing, another major section of the construction industry, the new-build sector is still fairly buoyant despite a subdued property market.

However this is primarily due to purchasing incentives offered by developers and there is concern that new-build sales could be hit by further interest rate rises or tax hikes post-election.

Although before the election the Government committed to building more social housing over the next five years, these will be low-cost properties that will not bring in much income for builders.

With such uncertainty surrounding the construction sector there is fear of another major collapse, similar to Benson earlier this year, which could have a dramatic knock-on effect on smaller construction companies.

Atradius says that businesses must tightly manage their credit to protect themselves from such failures.

Will Clark says: "Before Benson collapsed there were rumblings in the industry about financial problems with the company".

"We advised our clients working with Benson to change their credit status, stopping lines of credit, getting payment in advance or withdrawing as suppliers if these demands could not be met".

"As a result when Benson did collapse most of our clients did not suffer any major losses." Atradius says construction companies should be cautious in the current climate.

They should: * Credit check all customers on a regular basis.

* Keep up-to-date on industry information about concerns with companies.

* Tightly manage credit with guaranteed payment terms or cash in advance.

* Ensure credit insurance levels are adequate and up-to-date.

The Atradius Construction Industry Risk Analysis Public Sector Reduction of public spending, particularly on civil engineering projects, remains a worry, as does the slowdown of maintenance and repairs.

However, before the election the Government committed itself to major capital investment programmes in both health and education over the next two to three years.

Housing The housing market seems stable, although not up to the levels of recent years.

Interest rate rises could subdue it further, particularly for first time buyers.

This could be good for builders working in repairs and refurbishment as homeowners stay put and invest more in their current homes.

Some house developers are taking up the Government's challenge to design starter homes for GBP 60,000.

Commercial New building projects have slowed down as office space remains empty and rental incomes fall.

This has also impacted on maintenance and repairs as owners hold-off carrying out such work on vacant properties.

Labour The construction sector still has a shortfall of around 40,000 workers, although this is primarily for skilled tradespeople.

If the sector does decline further then obviously the demand will reduce.

The influx of cheaper workers, primarily from Eastern Europe, seems to have had less of an impact on the domestic workforce than had been feared.

A full copy of the Atradius Construction Industry Risk Analysis is available from the website.

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