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KPMG Global Construction Survey 2012

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The 2012 KPMG Global Construction Survey gauging the views of many of the senior executives of leading engineering and construction companies from around the world.

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KPMG Global Construction Survey 2012

  1. 1. KPMG INTERNATIONALThe great globalinfrastructureopportunityGlobal Construction Survey 2012kpmg.com/building
  2. 2. b | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  3. 3. A brave new direction forengineering and construction?The last three years have been full of uncertainty for many in the engineeringand construction industry. However, one constant is the insatiable demand forinfrastructure in all forms, which is causing a fundamental shift in focus for nearly allplayers in the sector.The ‘old’ imperatives of commercial, residential and industrialbuilding projects have taken second place in many geographies to energy, naturalresources, transportation, communication and technology, and other vitalcivil and social infrastructure projects.Much of this change is driven by thepressing challenge of urban growth;with the proportion of the world’spopulation living in cities set to rise tomore than 70 percent by 20501, thereis immense pressure to provide aneffective and reliable support network tothe teeming millions.And while the continuing economicinstability is impacting many parts ofthe industry, infrastructure is so vitalto growth that even the most cash-strapped governments will inevitablygive it a higher priority – or face adrastic change in lifestyles for theirpeople.Worldwide the expectedcost for infrastructure over the nextforty years is approximatelyUS$70 trillion.2Engineering and construction companiesare changing to meet the growingdemands of infrastructure, withthe traditional general engineeringproviders and contractors giving wayto larger, more diversified businesseswith specialized skills.Winning newcontracts is increasingly about havingthe right expertise, so the battle forskilled resources is likely to intensifyeven further, with a possible rise inacquisitions to buy that expertise. Newinfrastructure projects are expected to beon a huge scale, particularly in emergingmarkets such as India, China and Brazil,so size and global reach will also matter.With scale comes complexity as theglobal industry players navigate atough political, commercial, regulatoryand governance environment whichwill test their risk management abilityto the maximum extent. Marginson mega-projects can be severelyimpacted by unforeseen scheduledelays, sometimes customer driven andsometimes self-inflicted. Although thesector has invested considerably in riskmanagement in recent years, a numberof high profile project failures in the pasttwelve months raises question marksover the effectiveness of some of thisinvestment.The shape of the industry is changing asthe main players seek to optimize costs,focus on tax efficiencies, streamlinesupply chains, improve informationtechnology systems (IT), capitalize onemerging markets, and grow throughmergers and acquisitions. But willthese efforts be enough to succeed?As the world rises to meet the greatinfrastructure challenge of the nextdecade, what role will engineering andconstruction companies play?With these questions in mind, the latestKPMG Global Construction Surveycomes at an opportune moment,gauging the views of many of the seniorexecutives of leading engineering andconstruction companies from aroundthe world. I would like to thank allthose who gave their valuable timeto contribute to this vital and ongoingassessment of the future of the sector.GenoArmstrongInternational Sector Leader,Engineering & Construction,KPMG in the US1. United Nations, Department of Economic and Social Affairs, Population Division (2011).World PopulationProspects:The 2010 Revision2. Booz Allen Hamilton, Global Infrastructure Partners,World Energy Outlook, Organisation for EconomicCo-operation and Development (OECD), Boeing, Drewry Shipping Consultants, U.S. Department ofTransportation© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  4. 4. © 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  5. 5. Executive summary 02Opportunities and threats 05The great energy and infrastructure opportunityPerformance and future expectations 13Optimism in the midst of uncertaintyEfficiency19Building better practicesRisk management 29Coping with risk in a changing worldLooking forward 36The engineering and construction company of the futureAbout the survey 38Contents© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  6. 6. Demand for power and energy ischanging the direction of construction• Power and energy offer the best opportunities forrevenue growth• Public-Private Partnerships (PPP’s) most likely to befocused on energy and transportation projectsProcurement and supply chain playa critical role in future success• 59 percent of respondents say this area offers thegreatest opportunity to improve efficiency• Overly-complex systems and processes are hinderingprogress• 37 percent of firms from the Americas have notreviewed their procurement and supply chainprocesses for at least five yearsExisting infrastructure is seen asinadequate to support growingurbanization, population growth andchanging demographics• 53 percent feel government policies will fail to have apositive influence on infrastructure investment• 80 percent believe government is showing a lack ofleadership over infrastructure developmentIT needs to step up a level• 50 percent say that IT transformation is too costly andtakes too long• Surprisingly, 71 percent say they have formallyreviewed their IT systems within the previous 12monthsCost reduction remains on theagenda• Organizational culture is the biggest barrier togreater cost efficiency• 21 percent of respondents have not madesignificant cost reductions – rising to 29 percentin Europe, Middle East and AfricaForces shapingthe industryDrive for greaterefficiencyExecutive summary2 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  7. 7. The great global infrastructure opportunity | 3Optimism over future prospectsdespite economic uncertainty• 49 percent forecast an increase in backlog over thenext 12 months, with Asia Pacific companies the mostconfident• 75 percent believe margins on new bids will be equalto or more than existing backlogRevenue recognition concerns easing• Many construction contracts now likely to be considered assingle pieces of work in the proposed accounting standard• Revenue/profits for most contracts to be recognized continu-ously as work progresses, meaning less earnings volatilitythan previously feared• Companies still face retrospective implementation challengesDespite considerable investment, riskmanagement remains in question• 46 percent of respondents say few projects exceed theoriginal bid margin; in Europe, Middle East and Africa thisfigure rises to 56 percent• 54 percent failed to identify upfront the issues that latercaused margin erosion• Only 36 percent feel their project review processes are“very efficient”Investment in emerging markets still amajor challenge• Access to skilled resources the single biggest concernA need for morecertainty in avolatile worldA brighterfuture orcontinued pain?In 2011, KPMG interviewed executives from 161 engineeringand construction companies around the world.Therespondents’ annual revenue varied in size from US$250 millionto more than US$5 billion, and served a range of marketsincluding energy, power, industrial, healthcare/pharmaceutical,manufacturing, mining, education and government.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  8. 8. 4 | The great global infrastructure opportunity4 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  9. 9. The great global infrastructure opportunity | 5Opportunities and threatsThe energy and infrastructureopportunityEnergy is the sector with the greatest short-term potentialfor engineering and construction companies, according tothe 2012 Global Construction Survey. However, respondentsare questioning governments’ commitment to much neededinfrastructure investment.Energy is the sectorwhere respondentsare most confidentof increasingrevenue, followedby roads/bridges,rail and mining.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.When asked which sectors would most impact their future revenue in the nexttwelve months, energy was the number one response, suggesting a strongdemand for specialized engineering and construction services from customersin this segment. Four of the top five industries selected by respondents fitinto the category of infrastructure with traditional areas such as commercial,industrial, retail and education considered far less attractive.In the Americas the picture is even more pronounced, with 59 percent citingenergy as the most promising sector. Larger US contractors are expressinggenuine optimism over prospects for oil, gas and alternative energy projects,and expect significant amounts of activity in this area over the next five years.Respondents from Asia Pacific and Europe, Middle East and Africa considerrail and mining to be areas of promise (see chart on page 6).In China, where the latest Five-Year Plan has a strong domestic focus,there is an emphasis on resource-related infrastructure such as coalmining, high-speed rail, roads and waterways. Meanwhile, in Hong Kong,a number of important infrastructure projects will be carried out over thenext 5–6 years including underground train lines, bridges, and expresslinks to mainland China.
  10. 10. 6 | The great global infrastructure opportunityEducationalRetailIndustrialOfficeWater-relatedHealthcareMiningRailRoads/BridgesResidentialPower/EnergyOveralln=16041% 11%24% 23%24% 24%23% 4%21% 4%19% 9%18% 8%18% 20%17% 20%16% 27%9% 27%Americasn=27*ASPACn=49EMEAn=84Sectors most impacting revenue in the next twelve monthsIncrease Decrease*Low base – findings are directional in natureRespondents chose top two sectors for both increase and decrease.Source: KPMG International, 201111%59%7% 22%15%11%33%7%19% 0% 2%19% 4%11% 11%7% 22%26% 15%7% 19%4% 22%10%35%33% 14%22%18%24%4%29% 8%24% 12%20% 12%12% 20%12% 18%18% 29%12% 39%12%39%25% 27%27%30%20%2%17%15% 8%19% 5%24% 19%17% 23%17% 29%10% 21%View PointThe power market surges aheadAccording to the International EnergyAgency latest estimates, released inNovember 2011, the global energy sectorrequires US$38 trillion of investment inexisting and new capacity by 2035 tomeet the demands of population growth.US$17 trillion of this will need to flowinto power generation, distribution andtransmission, 60 percent of which willserve emerging markets.3Given the proper regulatory frameworkand government support, the fundsshould be there to support thisdevelopment; but the big question3. International Energy Agency (IEA), October 2011.Peter KissGlobal Head of Power UtilitiesKPMG in HungaryE: peter.kiss@kpmg.humark is the availability of skilled labor.The long development cycles – 12 yearsfor a nuclear plant and six years for gasor coal-fired plants – puts incrediblepressure on a manpower base that isalready stretched.The demand for firms and individualswith sector-specific engineering andconstruction skills will rise as projectsproliferate around the world.This shouldpush up the margins for specializedplayers and prove a major source ofincome for the industry as a whole.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  11. 11. The great global infrastructure opportunity | 7Less than halfof respondentsbelieve governmentpolicies will havea positive impacton infrastructureinvestment.Lack of commitment to infrastructureWith austerity policies in manycountries constraining the scope forpublic sector spending, it is vital tocreate an environment that encouragesprivate sector investment. It istherefore of some concern that only47 percent of respondents considertheir government’s policies are havinga positive impact, a response that isfairly consistent across all regions.Interestingly, executives from thebigger organizations involved in thesurvey are the least optimistic thatpublic sector policies are helping –perhaps an indication that governmentsare focusing on smaller-to-mediumsized enterprises and assuming largerbusinesses need less help.Impact of government policies on infrastructure investmentRegion SizeSignificant positive impactFairly negative impactNo impactFairly positive impactDon’t knowSignificant negative impact*Low base – findings are directional in naturePercentages might not add up to 100 due to rounding offSource: KPMG International, 2011More thanUSD 5 billion(n=24*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=85)ASPAC(n=49)Americas(n=27*)Overall(n=161)8%8%16%23%24%18%15%7%15%19%22%8%20%22%27%19%18%8%8%14%25%22%18%3%10%16%26%19%21%8%17%25%25%8%13%11%4%14%20%32%18%4%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  12. 12. 8 | The great global infrastructure opportunityPPP’s commitment to energyEnergy tops the list of attractiveprojects to be delivered underpublic-private partnership (PPP’s),closely followed by transportation.Respondents from the Americas areparticularly interested in the transportmarket, where the US is keen toimprove its rail, road, air and shippingnetwork to cope with 21st centurydemands.OthersTele-communicationsEducationHousingWasteWaterHealthTransportationEnergy12%7%4%18%12%0%4%20%0%9%4%14%4% 4% 4% 4%7%4%12%5%21%24%19%19%34%31%40%19%26%12%16% 16%33%56%30%24%Sectors offering the most attractive potential for public-private partnerships (PPP’s)Overall (n=160) Americas (n=27*) ASPAC (n=49) EMEA (n=84)Figures do not add up to 100% because multiple responses were allowed*Low base – findings are directional in natureRespondents had ability to select more than one sector.Source: KPMG International, 2011© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.Respondents are also very concernedabout governments’ ability to driveinfrastructure spending, with anoverwhelming 80 percent citing lack ofleadership as a major barrier. It is notjust the politicians who appear to beholding back development, as two-thirdsfeel the private sector is not showingenough initiative either, though publictendering rules often make it hard fora private sector business to capitalizeon a good idea without it being openedto competition (see chart on oppositepage). Despite the potential rewardsfrom infrastructure projects in certainregions, a number of US businessesremain reluctant to take the risksassociated with equity positions insuch initiatives.
  13. 13. The great global infrastructure opportunity | 9Overall Americas ASPAC EMEAMost significant barriers to infrastructure investmentMost important risk*Low base – findings are directional in natureRespondents ranked the top two barriers to investmentSource: KPMG International, 2011OthersLack of investmentby the private sectorCost of debtDebt market liquidityconstraintsRegulatoryburden/red tapePlanning systemLack of investmentby governmentLack of privatesector initiativeLack of leadershipby government809*7025*4227*13*13*19*17*1*15*3*9*3*0*3*1*302*16*8*10*8*4*3*9*336*3914*23*16*9*7*9*80% 71%100%60%33%67% 13%33%83%50%56%38%40%31%82%67%46%57%52%33%67%51%48%38%30%23% 33%15%11% 11% 11%Base Base Base BaseView PointNick ChismGlobal Head ofInfrastructureKPMG in the UKE: nick.chism@kpmg.co.ukWaking up to the infrastructure opportunityAs governments around the world seekto create 21st century infrastructure,they need to take a strong lead tocreate an environment that encouragesprivate sector investment.This meansaddressing regulatory and legislativebarriers and showing the kind of long-term will that transcends immediatepolitical popularity.New investment models have tomeet the interests of both the publicand private sectors, with a betterunderstanding of risk allocation, greatertransparency and more accuratemeasures of cost and performance.Government should ensure it buildsmutual trust and cultural understandingof its commercial partners, and showsstrong leadership to push projectsthrough multiple departments andcompeting interest groups.The publicsector also has to improve its technicalskills in procurement, planning andproject management.Funding will be a further challenge,so governments should be willingto pursue existing and new sourceswhether it is higher tax, increasedenergy bills, or pay-per-use resourcessuch as road tolls. And given the globalpush for infrastructure, there will beintense competition for resources andskills, so every state must work toattract the best private sector talent.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  14. 14. 10 | The great global infrastructure opportunity71%say economicuncertainty is thebiggest businessconcern in theirhome region.Economic conditions front of mindContinued worries over the state ofthe global economy are reflected in thesurvey findings. Not surprisingly, whencommenting about current businessconditions in their home regions, alarge majority (71 percent) say thateconomic uncertainty is the biggestconcern. Given the ongoing crisis overthe Euro, it is no real surprise that firmsfrom EMEA are the most nervous, withone European executive quoted assaying: “Even the traditional optimistsare finding it less cheerful.”Respondents from Asia Pacific arerelatively less pessimistic abouteconomic prospects and instead pointto skills shortages and inflation as acontinuing worry, with Hong Kong andChina suffering from a lack of basicconstruction resources and somecommodity prices rising at a double-digit rate. In the Americas, the growingUS government deficit is proving amatter of some concern to constructionexecutives, who fear this may constrainany economic recovery.Greatest concerns over business conditions in your principal regionOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)20%71% 70%82%51%31%26%45%25%EconomicuncertaintySkillshortageGovernmentdeficits/debtOthers NewcompetitionInflation Dealingwith regulatorychangesUnemployment30%52%12%34%20%15%18%15%37%13%22%13%7%27%7%11% 11%8%12%4% 4%2%5%‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose top two greatest concernsSource: KPMG International, 2011© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  15. 15. The great global infrastructure opportunity | 11© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  16. 16. 12 | The great global infrastructure opportunity12 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  17. 17. The great global infrastructure opportunity | 13Performance and future expectationsOptimism in the midstof uncertaintyIn spite of the troubles afflicting sovereign debt and even moreworrisome, the crisis impacting the Euro zone, engineering andconstruction industry executives remain positive about the future.Half expect backlogs to increase in the next year and the majorityfeel margins will either rise or stay at current levels.2011 appears to have been a solid yearfor the sector, with 56 percent reportingan increase in backlog and only 18percent experiencing a decline.Thebest performing region was Asia Pacific,where almost two-thirds (64 percent)say their backlog has gone up, dueto intense activity in Hong Kong andChina.The economic woes in Europeare mirrored by the survey responsesfor this region, with only 21 percentreporting a significant increase. In theUK, for example, some of the biggestplayers are finding their order booksdeclining and are preparing for aprolonged recession.Performance among the biggercompanies was noticeably poorer thantheir smaller counterparts. A number oflarge organizations may have workedthrough their backlog, and are nowaffected by a lack of major public andprivate projects – many of which remainon hold.Change in backlog from 2010 to 2011Region SizeIncreased 5-15%Increased more than 15%Decreased 5-15%Mostly unchanged (+/-5%)Decreased more than 15%Percentages might not add up to 100 due to rounding offSource: KPMG International, 2011More thanUSD 5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=85)ASPAC(n=49)Americas(n=27*)Overall(n=160)14%24%28%28%4%15%22%26%33%20%29%35%10%4% 2%26%27%21%15%6%14%21%34%26%2%13%43%22%22%14%20%24%30%8%64%of respondentsfrom Asia Pacificsay their backloghas gone up in 2011.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  18. 18. 14 | The great global infrastructure opportunityCompared to KPMG’s previous GlobalConstruction Survey, backlog marginsappear to have improved significantly,with more than twice as many companiesenjoying an increase in 2011.Theproportion experiencing declining marginshas also dropped a few points.The worstperforming region is the Americas, where41 percent of respondents report a dropin margins.This may be due in part to ashift in the balance of power in favor ofcustomers, who are negotiating lowermargins on future projects, and becauseof new foreign entrants who are causingan increase in competition.Despite reporting the lowest backloggrowth, the larger companies involved inthe survey have still managed to maintaintheir margins, with 44 percent reportingan increase.These organizations havemanaged to take a lot of cost out of theirbusinesses in recent years and many arenow running lean, efficient operations.Change in backlog margin from 2010 to 2011Region SizeIncreased more than 5%Decreased 2-5%Mostly unchanged (+/- 2%)Increased 2-5%Decreased more than 5%Percentages might not add up to 100 due to rounding offSource: KPMG International, 2011More thanUSD 5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=49)Americas(n=27*)Overall(n=160)16%48%13%13%7%30%37%15%7%44%16%12%19%11% 4%55%12%12%10%7%21%59%9%3%7%13%4%39%9%35%14%44%16%13%8%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  19. 19. The great global infrastructure opportunity | 15Positive future expectationsLooking ahead to the next 12 months,the engineering and constructionindustry appears to be fairly optimisticabout backlog – even in the troubledEurope, Middle East and Africa region,which is a surprising response given theuncertainty over the state of the Euro.Only a small proportion of respondentsforecast a decline in backlog andhalf expect an increase. Asia Pacificrespondents are the most confident ofcontinued improvement, again fuelledby the ongoing construction boom inChina and Hong Kong, focused primarilyon infrastructure.Interestingly, the smaller-to-mediumsized companies involved in the surveyexpect to see a substantial rise inbacklog, probably because any wins theyhave enjoyed will have a bigger impactproportionately on their smaller portfolio.With many major infrastructure projectson hold, modest repair and maintenancecontracts are the order of the day, whichare more likely to be picked up by thesmaller, locally-focused contractors.Backlog forecasts for bigger firms aresteadier with a majority (61 percent)anticipating no change, which reflectstheir greater diversity.11%Only 11 percent offirms anticipate adecline in backlogin 2012.Backlog forecast for the next 12 monthsRegion SizeIncreased more than 15%Decreased 5-15%Mostly unchanged (+/-5%)Increased 5-15%Decreased more than 15%Percentages might not add up to 100 due to rounding offSource: KPMG International, 2011More thanUSD 5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=49)Americas(n=27*)Overall(n=160)9%37%28%21%2%11%41%19%22%35%29%24%6%7% 2%37%30%20%11%2%10%40%31%16%3% 4%61%26%9%10%28%27%29%4%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  20. 20. 16 | The great global infrastructure opportunityThe majority of respondents believethat future margins will be largelyunchanged – even in Asia Pacificwhere, as mentioned, markets such asHong Kong are undergoing very highinflation that could push up the price ofmaterials. However in the Americas, athird say that margins are going down,which in an industry that is already low-margin could lead to further stress onthe business.The larger firms are extremely confidentthat they can maintain current levels ofprofitability.These companies havelonger term backlogs, giving greatercertainty over future revenues, costs andmargins.They also tend to have older anddeeper client relationships so they knowmore about customers’ capital spendingplans, enabling better targeting andconversion of opportunities.In contrast, smaller firms are lessdiverse and can quickly suffer if aparticular sector is underperforming, soit is of some concern that 25 percentof smaller-to-medium-sized businessesare expected to endure even lowermargins, which again could createfurther distress for some companies.Many such firms are anticipating acontinuingly competitive market andmay be willing to take on work at lowmargins just to maintain cashflow andretain workers.Margin forecast on current bids versus margin in current backlogRegion SizeMargins on new projects are more than 2 percentage points higher than existing backlogMargins on new projects are mostly unchanged (+/-2 percentage points) versus existing backlogMargins on new projects are more than 2 percentage points lower than existing backlogUnsurePercentages might not add up to 100 due to rounding offSource: KPMG International, 2011More thanUSD 5 billion(n=23*)USD1-5 billion(n=57)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=48)Americas(n=27*)Overall(n=159)21%62%13%2%33%15%52%69%13%17%62%13%19%6%4% 1%21%65%12%4%83%13%25%54%14%6%75%believe that marginson current bids willbe either the sameor higher than forexisting projects.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  21. 21. The great global infrastructure opportunity | 17Paving a smooth road to acquisitionWith a number of businesses eitherstressed or distressed, and othersshedding non-core elements toraise cash, merger and acquisition(MA) opportunities abound forthose engineering and constructioncompanies looking to add newcapabilities or improve on existingones.However the road to acquisition isstrewn with obstacles, so buyers haveto ensure they have a strong MAteam and robust processes to helpuncover risks in the target’s business,including quality of earnings, quality ofassets, customer and supplier matters,cultural fit, retention of key personaland specialist skills, achievement ofsynergies, financial reporting, tax andaccounting structuring, projections,and integration risk assessment.Historical operating results may bedistorted by the recent economicdownturn which requires even furtherin-depth analysis of prior operatingresults, current backlog and projectedfuture earnings.The acquirer should be able torapidly mobilize a global MA teamwith knowledge of the target’sbusiness (through its own strongindustry experience), as well as anunderstanding of the broader risksand challenges associated withtransactions.The team should alsohave the skills and the willingness tochallenge financial projections, assetsstrength and customer and supplierrelationships, and understand potentialtax exposures that could affect thedeal, as well as further risks inherent inintegrating the new entity. Also, localcountry expertise is critical in assessingthe risk of illegal and questionable actsor payments, currency restrictions andother relevant risks related to operatingin foreign jurisdictions.In carrying out the right due diligence,potential purchasers should identifythe significant risks existing within thetarget, to uncover any deal-breakingissues that could affect the saleprice or even scuttle the deal, suchas purchasing behavior of targets,major customers, supplier activity,distribution channels and competition.It is also important to carry adetailed analysis of the key financialinformation necessary to evaluatesynergies and value creation, includingthe drivers of sustainable profits andfuture cash flows. Access to key datais vital, and calls for a sizable team togather and analyze information.“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.View PointTony BohnertTransaction Services Partner,KPMG in the USE: abohnert@kpmg.com© 2012 KPMG International Cooperative (
  22. 22. 18 | The great global infrastructure opportunity18 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  23. 23. The great global infrastructure opportunity | 19EfficiencyBuilding better practicesAs they seek greater efficiency, engineering and construction firmsare trying to overcome a range of complexities in procurement andsupply chain processes. And, while acknowledging the need toreplace often outmoded IT systems, they’re also concerned with thecost and effort required.The executives taking part in the surveyfeel that two areas of the businesshave the biggest potential for improvingefficiency: procurement/supply chainmanagement and business processes.Procurement/supply chain is a hugelycritical component of the overallservices delivered, and those with themost efficient and competitive supplychains are likely to win more work,especially in emerging markets such asBrazil, Russia, India and China.In addition to these factors, a number ofrespondents from larger organizationsare focused on optimizing their ITsystems and rationalizing legal entities,both of which can help to reduce thecomplexity inherent in businesses ofscale and diversity.Top functional areas with opportunities to improve efficiencyOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)16%59%48%62%59%53% 52% 51%55%21%19%29%18%15%11%16%19%10%19%15% 14%19% 18%11%9%11%6%9%4%15%2% 2%Procurement/supply chainmanagementRefiningbusinessprocessesIT systemsoptimizationKnowledgemanagementHRmanagementShared services/OutsourcingLegal entityrationalizationTax expenseefficiencies‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose top two functional areas.Source: KPMG International, 201159%of respondents feelthey can gain greaterefficiency out oftheir procurementand supply chainactivities.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  24. 24. 20 | The great global infrastructure opportunityCreating a low-cost cultureIn the continued difficult economicconditions, cost reduction remains highon the agenda for most companies.According to the respondents, the singlebiggest challenge to cutting costs isorganizational culture, particularly in theAmericas, where 78 percent cite thisfactor, suggesting old habits are provingdifficult to break. Larger companiesare concerned that they cannot easilyidentify where excesses exist withintheir organization, which once againhighlights the need for better businessprocesses to manage the complexities ofmultinational businesses.Surprisingly, 17 percent say that costreduction has simply not been a priority.These executives may representcompanies that have already trimmedcosts extensively during the recessionand now have very lean operations, withlittle or no scope for further reductions.Challenges in reducing costsOverall (n=160) Americas (n=27*)ASPAC (n=49) EMEA (n=84)Changing thecultureReluctance to cut directlabor force in light of theprojected marketreboundNot enough processesare automated, drivingthe need for increasedindirect laborUncertainty overwhere the excessesexist in the organizationIt has not beenpriority to reducecostsOthers‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose top two greatest challenges.Source: KPMG International, 201128%61%78%57%59%29%37%18%32%29% 30% 29% 29%17%7%16%19%31%29%20%37%30%47%33%78%of engineeringand constructioncompanies fromtheAmericas sayorganizationalculture is a barrierto cutting cost.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  25. 25. The great global infrastructure opportunity | 21Cost cuts seem to be spreadfairly evenly across a number ofdifferent departments, although riskmanagement has been impacted themost. Again, it’s remarkable that afifth of all respondents say they havemade no significant cost reductions –a figure that increases to 29 percentin Europe, Middle East and Africa. Anumber of firms in this region contract-in resources on a project basis andhave little direct labor. With fewerfixed costs, there is less need to cutback. Many had also been optimisticof an economic recovery and felt theycould ride out the storm. In addition,the larger European businesses areprotected by their diversity so theycontinue to prosper in certain sectors(such as utility-related projects in theUK) despite the decline in constructionand civil engineering work.Areas of your business where cost reductions will have the greatest impactOthersRegulatorycomplianceFinancial riskmanagementManagement of outsourcing/extended supply chainEmployee talent pool and training leadership pipelineWe have not made significantcost reductionsRisk managementOverall Americas ASPAC EMEA21%16%13%8%1%19%n=160 n=27* n=49 n=8430%11%22%15%7%15% 24%16%18%6%6%2%27% 11%7%14%15%29%24%23%‘Yes’ percentages represented*Low base – findings are directional in natureSource: KPMG International, 2011© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  26. 26. 22 | The great global infrastructure opportunitySimplifying supply chain managementAttempts to establish consistent bestpractices in procurement and supplychain are faltering due to over-complexsystems and processes, accordingto KPMG’s 2012 Global ConstructionSurvey. Engineering and constructionbusinesses in Asia Pacific say they aresuffering from a lack of robust data,while the larger multinational playersfrom all regions are finding that theirsheer size and spread makes it hardfor personnel to follow a commonstandard.Of course, none of this is helpedby the fact that, in the Americas atleast, nearly four in 10 (37 percent)claim not to have reviewed theiroverall procurement and supply chainprocesses for at least five years – andsome have never carried out such areview.Greatest challenges in enhancing procurement/supply chain managementOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)Disparate processesand systems createinconsistencies andunnecessarycomplexitiesToo many manualprocesses orunnecessarysteps along thesupply chainLack of qualityinformation andtrend dataGeographic separationof supply chainpersonnel createscomplex handoffsOur skills have notkept pace withadvance in systemtechnologyOthers Not relevant‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose top two greatest challenges.Source: KPMG International, 201125%39%48%35%41%38%22%35%45%29%15%39%28%12%19%10%33%20%25%12%20%26%27%15%18%19%14%20%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  27. 27. The great global infrastructure opportunity | 23View PointDouglas GatesPrincipal, AdvisoryKPMG in the USE: dkgates@kpmg.comIn the supply chain, knowledge is powerThe recession has exposed weaknessesin many engineering and constructioncompanies’ procurement and supplychains. In the good times, when marginswere relatively high, organizations weremore concerned about getting hold ofmaterials quickly than keeping costsdown. However, in today’s competitivemarket conditions, a few percentagepoints on purchase prices can make thedifference between a profit and a loss.Inventory costs have also surged, asstock levels have risen due to cancelledprojects and uncertainty over futureavailability.In a number of regions, suppliershave either gone out of business ordownsized, forcing companies to lookoverseas for alternative sources, addinggreater complexity to the supply chain.Engineering and construction businessesare typically fragmented (partly a resultof having grown through mergersand acquisitions), with a high level oflocal autonomy and series of disparateenterprise resource planning (ERP)systems around the different businessunits, preventing leaders from gaininga complete view of purchasing activityacross the business.As the respondents in this year’s surveyacknowledge, investment in IT doesn’tcome cheap; a fully-integrated systemcan cost tens of millions of dollars andtake from two to five years to complete.Nevertheless, those brave enoughto fund major IT enhancements arenow reaping the rewards of greatercentralization and transparency.Theycan reduce purchasing costs by takingadvantage of economies of scale.Theycan also take a high-level view acrosstheir supply chain to spot any weaklinks, and hedge against price risesor falls by buying advance stock, orpossibly vertically integrate to safeguardsupplies of vital materials. Finally, theycan improve forecasting by workingclosely with suppliers at different pointsin the supply chain on forecasting, toensure adequate capacity and optimuminventory levels.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  28. 28. 24 | The great global infrastructure opportunityGetting value out of IT spendHaving invested heavily in IT in the late1990s in preparation for theYear 2000bug, the industry has fallen behindsomewhat in the quality of its systems,with an excess of manual procedures thatpush up costs and slow down reporting.However, there is a question mark overcompanies commitment to upgradingor replacing systems, as respondents’greatest IT optimization challenge is thetime and cost of transformation. A third(33 percent) think there are not enoughconstruction-specific ERP packages,which makes implementation even moredifficult. A number of executives fromcompanies in Europe, Middle East andAfrica feel that their organizations cannotdemonstrate the value of IT spend.Greatest Challenges in IT OptimizationOverall (n=160) Americas (n=27*)ASPAC (n=49) EMEA (n=84)An insufficientnumber of ERPpackages has beendesigned with theEC industry in mindChange in ITsystems takes toolong and coststoo muchExcessive use of“workarounds”Disproportionateamount of ITspend it focusedon supportingexisting technologyYour companyis not able todemonstratethe value of ITspendingComplaints thatlegacy systemswere betterOthers Not relevant19%50%44%51%51%33%30%37%32%29%33%31%27%14%4%6%30%20%14%23%11%19%10%8%23%19%29%20%11% 11%8%12%‘Yes’ percentages representedRespondents chose top two greatest challenges.Source: KPMG International, 2011In trying tooptimize IT, thegreatest concernis the time andcost of businesstransformationprograms.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  29. 29. The great global infrastructure opportunity | 2562%have reviewed theirtax accountingmethods in the pasttwelve months.Managing tax effectivelyIn an increasingly global, interconnectedmarketplace, tax is gaining in importanceas companies seek to be compliantand optimize their structures andreporting.This includes issues suchas: income/expense recognition forlong-term contracts; simplified cost-to-cost percentage completion method;accounting for fixed assets andinventories; and RD credits.Encouragingly, 62 percent of thosetaking part in the survey say they havereviewed their tax accounting methodsin the past 12 months, suggestingthat most businesses are seeking toimprove their procedures. Given theglobal nature of their businesses, it issurprising that the larger organizationsare the least likely to have conducteda critical appraisal; indeed, one-sixth(17 percent) of all large companiesclaim to have never held such a review.In optimizing tax, no single factorappears to be of most importance,although America’s respondents pointto a lack of processes for coordinatingtax managers with project managers,along with tax complexities associatedwith cross-border financing.Possibly the most extraordinaryrevelation is that almost half(45 percent) of all executives in thesurvey feel that tax optimization is notrelevant to their organization. Sucha mindset may be more prevalentamong companies that are lessglobal and therefore have feweropportunities for tax planning. It isalso possible that some executivesdo not appreciate the full potential oftax optimization, viewing tax as moreof a ‘housekeeping’ function.Greatest challenges in tax optimizationOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)Others Not relevant22%18% 18%12% 11% 11%3%14%45%33%22%30%15%11%19%0%11%30%14%12% 12%18%8% 8%4%8%57%24%20%18%7%12%9%4%19%44%Lack of processesfor timelycoordination oftax, finance andbusiness unitproject managersLack ofunderstanding ofthe proper oravailabletax treatmentsTax implicationsof cross-borderfinancing iscomplex andnot efficientlymanagedTaxdepartment’slack ofstrategicleadershipInconsistentmethodologiesused throughoutthe companyExisting ITsystems donot provideadequate detailor are notadequatelyleveraged bythe taxdepartmentIT systems arechangedwithout propertax departmentinput‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose top two greatest challenges.Source: KPMG International, 2011© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  30. 30. 26 | The great global infrastructure opportunityView PointMichael MooreTax Market LeaderKPMG in the USE: mmoore@kpmg.comTax is an integral part of your businessAs the industry becomes more global,engineering and construction firms areexposed to an ever wider range of taxregimes, any one of which can havea big impact upon earnings. Perhapsthe biggest challenge is determiningwhich countries will tax a project. If aproject based in a low-tax country losesmoney there is very little tax benefit.Conversely for work based in high-taxnations, successful, high-margin workwill be taxed heavily.Bidding teams should therefore look toinclude appropriate specialists at theearliest stages of the tender process, toassess potential tax risks and structurethe contract in a way that optimizes theoverall tax burden. A project tax plan isjust the start; systematic monitoring isneeded to ensure compliance, with acontrol approval committee for largermultinational projects where volatility ishigher.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  31. 31. The great global infrastructure opportunity | 27The great global infrastructure opportunity | 27© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  32. 32. 28 | The great global infrastructure opportunity28 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  33. 33. The great global infrastructure opportunity | 29Risk managementCoping with risk in achanging worldWith significant incidents of margin erosion, respondentsare understandably eager to continue to improve their riskmanagement, while just 36 percent believe their projectreview processes to be “very efficient.”The occasional incidence offailing projects (sometimes withcatastrophic consequences) confirmsthat engineering and constructioncompanies are never immune torisks across their range of activities.This year’s survey suggests thatthe industry’s senior executivesare concerned about a range ofrisk management issues, withquantification of risk at the top of thelist and risk identification the nextmost important.Respondents from the Americas areespecially keen to better understandthe link between strategy and risk,while bigger construction firms see riskmitigation as their biggest challenge.Some companies may have had difficultyidentifying or even ranking all risks priorto executing strategic plans, especiallywhen entering a new market sectoror geographic location or pursuingaggressive growth. Others may haveheavily incented middle managementto grow, meaning that leaders struggleto keep a focus on risks, some of whichare out of a contractor’s control. Othersmay have tried to contractually mitigateevery risk, only for the customer/ownerto squeeze the profit margin during thenegotiation stage.Greatest challenges of enterprise risk managementOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)Quantifying risks Identification of risks Mitigation of risks Tracking andreporting on risksUnderstanding thelink between strategyand risk‘Yes’ percentages represented*Low base – findings are directional in natureRespondents chose two greatest challenges.Source: KPMG International, 2011Others45%40%36%34%28%10%33%52%26%19%48%15%43%31%41%39%24%14%49%42%36% 35%24%6%Constructionexecutives areconcerned aboutseveral riskmanagement issues,with quantificationof risk first andrisk identificationsecond.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  34. 34. 30 | The great global infrastructure opportunityIdentifying and addressing risksto marginsAlmost half of the respondents say thatfewer than 25 percent of their projectsexceed the original bid margin, indicatingconsiderable room for improvementin dealing with project risks such asrising costs, supply chain interruptions,financing and resource shortages.The situation appears more acute inEurope, Middle East and Africa, as wellas among the smaller companies in thesurvey. It is likely that big engineering andconstruction firms have better-developedprocesses for assessing and addressingproject risk.Proportion of projects delivered above original bid marginRegion SizeLess than 25%50.1% to 75%100%25.1% to 50%75.1% to 100%*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 2011More thanUSD5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=49)Americas(n=27*)Overall(n=160)15%24%46%13%2%19%37%15%30%29%35%16%20%55%14%6%20%4%10%14%33%41%2%22%4%30%13%30%9%14%22%54%1%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  35. 35. The great global infrastructure opportunity | 3154%say that forprojects thatsignificantly under-performed, theyfailed to identifythe ultimate causeof margin erosionat the biddingstage.When asked about projects thatsignificantly under-performed, a majority(54 percent) admit they failed at biddingstage to identify the risk that ultimatelymaterialized and caused margin erosion.This is a surprisingly high response,suggesting a clear need to employ morerigorous upfront assessment of potentialproject risks.Margin erosion identified at bidding stageRegion SizeYesNot sureNoNot Relevant*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 2011More thanUSD5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=49)Americas(n=27*)Overall(n=160)24%54%10%11%30%63%7%24%57%10%8%23%50%11%17%21%62%12%5%35%48%17%24%51%6%19%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  36. 36. 32 | The great global infrastructure opportunityProjects under scrutinyOnly 36 percent of the respondentsconsider their project review processesto be “very efficient”, and the figure forlarger firms is just 30 percent, whichis of some concern given the sizeand complexity of the projects theyundertake – and could help explain themargin erosion mentioned earlier.Thisfinding suggests that just a minorityof engineering and constructioncompanies carry out a system-generatedassessment of financial information,which in turn facilitates a qualitativeproject review. Robust, consistent andongoing project analysis is paramount toimproving project management practiceas well as overall project performance.Efficiency of project review processRegion SizeVery efficient – i.e., largely a review of system-generated financial informationto facilitate qualitative reviewSomewhat efficientNot efficient – i.e., information needs to be secured from multiple systems beforeperforming a qualitative reviewNot relevant*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 2011More thanUSD5 billion(n=23*)USD1-5 billion(n=58)Less thanUSD1 billion(n=79)EMEA(n=84)ASPAC(n=49)Americas(n=27*)Overall(n=160)36%48%14%3%41%4%52%4%33%53%12%2%36%43%18%4%43%47%9%2%30%52%9%9%32%47%19%3%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  37. 37. The great global infrastructure opportunity | 33View PointClay GilgeManaging DirectorMajor Projects AdvisoryKPMG in the USE: cgilge@kpmg.comContinuously improving risk managementIn KPMG’s first Global ConstructionSurvey in 2005, risk management wasrated as the single biggest challengefacing engineering and constructioncompanies in their quest to deliverprojects on schedule and on budget.Since that time, the industry has madesubstantial progress including, theinception and growth of the EngineeringConstruction Risk Institute (ECRI), as wellas improved ratings for risk managementquality in subsequent KPMG surveys,suggesting that many organizations nowhave adequate systems and processes inplace to manage risk.Yet 2011 has still seen a few well-publicized project failures, whichindicates a breakdown in some firms’structured risk management. Many ofthis year’s respondents say they areunable to exceed their intended marginon projects, suggesting further room forimproving the way they manage risk.Businesses do not need more policies,procedures and controls; they needto integrate existing measures into asystem that gives real-time access toproject performance.This will enablethem to identify actual and potentialproblems (such as contract execution,change orders or scheduling), andimprove controls to reduce the chancesof a re-occurrence. Such continuousfeedback loops can be appliedorganization-wide to raise standards andbenefit projects wherever they occur.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  38. 38. 34 | The great global infrastructure opportunityChallenges in emerging marketsWhile emerging markets representa big opportunity for engineering andconstruction companies, these marketsfrequently come with a high degree ofuncertainty.The respondents consideraccess to appropriate skilled resourcesas their single biggest concern, followedby political risks and cultural differences.Interestingly, only 14 percent cite“variability of the legal system” as amajor risk factor; a number of firms havehad difficulties with local legal issuesin emerging markets, so they shouldensure they fully understand how suchfactors could impact their business.Risk factors while doing business with emerging marketsOverall (n=161) Americas (n=27*)ASPAC (n=49) EMEA (n=85)*Low base – findings are directional in natureRespondents chose top two most important risk factors.Source: KPMG International, 201141%33%25%14%11%9% 9%6%22%37%33%30%7%15%7%4%7%30%43%24%31%14%10%18%10%2%18%41%38%20%16%9%5%11%7%22%Accessto skilledresourcesPolitical risks Understanding/adapting toculturaldifferencesVariability oflegalsystemRepatriationof capitaland profitsUnstablelabor marketsForeigncurrencyuncertaintyCross-borderfinancinguncertaintiesNot relevant© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  39. 39. The great global infrastructure opportunity | 35View PointSteven GattAsia Pacific Sector LeadKPMG in AustraliaE: sgatt@kpmg.com.auFears ease over revenue recognitionThe latest Exposure Draft (ED) onRevenue from Contracts with Customers(issued in November 2011) goes someway to addressing the sector’s concernsover accounting for long-term contracts.Many contractors now believe that thecriteria in the revised ED will allow themto identify the vast majority of contractsas a performance obligation that can beaccounted for as one integrated pieceof work. And the criteria for determiningwhether control of goods or servicesare transferred continuously havebeen broadened, which should enablerevenue and profits for most contractsto be recognized progressively, leadingto less volatility in earnings.The revisedproposals will also allow recognition overtime based on input methods (e.g., cost)as well as output methods (e.g., surveysof work done).On the flip side, the criteria forrecognizing claims and variationsare different from those in currentaccounting standards, while the EDis still asking for extensive additionaldisclosure requirements. KPMG workedwith associations around the world tohelp lobby for changes to accountingboards, who have listened to industryinput.The great global infrastructure opportunity | 35© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  40. 40. Looking forwardThe engineering and constructioncompany of the futureKPMG’s Global Construction Survey2012 shows engineering andconstruction executives to be largelyoptimistic about their short-termprospects globally. Over the comingdecades, demand for services shouldremain strong as nations struggle tomeet growing power and infrastructurerequirements. Irrespective of thesource of funding (public or private), thebottom line is: the world needs moreinfrastructure, and engineering andconstruction companies are poised tonot only capitalize on this opportunity,but to take a leadership role in shapinginfrastructure for generations to come.In preparing for an anticipated wave ofnew projects, the industry should seek toposition itself appropriately, which meansbuilding efficiencies through optimizingcosts, re-thinking tax structures,streamlining supply chains, enhancingIT systems, capitalizing on emergingmarkets and, where necessary, growingthrough mergers and acquisitions. Embracing such ideas could change theshape of the sector and of individualcompanies, so we asked the surveyparticipants how they envision theengineering and construction businessof the future, and received some highlyinsightful responses (see oppositepage).36 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  41. 41. Scale: going globalAs one respondent comments: “Geographic expansionwill increase, mainly in emerging countries as domesticand regional markets are perceived as mature.” Scaleis necessary to compete globally and to tackle largeenergy and other major infrastructure projects, which inturn creates the diversity to cope with regional volatility.Further consolidation is expected, with an opening up ofthe MA market. According to another survey participant,construction companies will become: “diversified andglobal, with more vertical integration.There will be nomiddle class to speak of. Small local companies willsurvive, but nearly all mid-sized companies will be slowlyacquired by the global leaders.”Range and depth of services: “design, build,finance and operate”In the words of one industry executive, “Companieswill offer a wider range of services including front-end consultancy/engineering, construction andmaintenance or facilities management” as part of a“total procurement” solution. Another comments that:“Large construction companies will have the capabilityto look after assets over the full life cycle.They will havea broader range of service and specialism.” This is likelyto lead to a rise in direct labor, with an associated needfor training and management development to builda highly mobile, global workforce, making the sectormore attractive to graduates and new entrants to theworkforce.Stakeholder management: towards closerrelationshipsA survey participant urges the industry to work moreclosely with the public sector on infrastructure andPPP’s, emphasizing that: “A company needs to be moregovernment-oriented.” Referring to the same issue,another executive feels that PPP’s require companies tobe: “... more flexible and innovative, exploring alternativeareas of procurement and building a different skill basewhen involved in contract procurement. Engineering andconstruction companies will also have to put equity intoprojects.”When discussing relationships on a broaderbasis, one respondent saw room for improvement:“Firms need to work better with the contractors andbecome more of a business partner.”Sustainability: an evolving issueThe importance of a sustainable approach to the entireconstruction cycle is succinctly summed up by thisrespondent: “Sustainability starts and ends with theconstruction industry.The materials used, the wasteproduced and the final built environment – and thereforethe sector – must become leaders in sustainability.”However, regulatory change will also be a big driver ofbehavior, according to an industry executive, who arguesfor engineering and construction companies to play an:“active role, since clients – mainly in Northern Europe –increasingly demand audited data on sustainability issues/ratios; therefore companies should actively shape thediscussion.” A number of those involved in the surveypoint to the increasing range of opportunities arising fromsustainability, including the development of infrastructurefor renewable energies and green buildings. However, oneindustry leader noted the need to be pragmatic and feelsthat: “The business looks to work in a sustainable way, butit is customers that will drive the agenda – and currentlythey look at price not sustainability.”The great global infrastructure opportunity | 37© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  42. 42. 38 | The great global infrastructure opportunityAbout the surveyAll survey responses were gatheredthrough face-to-face interviews in2011 with 161 senior leaders – many ofthem Chief Executive Officers – fromleading engineering and constructioncompanies in 27 countries around theworld.The interviews were carried out bysenior representatives from KPMGmember firms specializing in theengineering and construction industry,with the questions reflecting currentand ongoing concerns expressed byclients of KPMG member firms.Respondent companies’ turnoverranged from less than USD250 millionto more than USD5 billion, with a mix ofoperations from global through regionalto purely domestic.Regional breakdown of participantsEMEA Americas Asia Pacific*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 2011More than 5 billion (n=24*)1-5 billion (n=58)Less than 1 billion (n=79)Overall (n=161)53%17%30%62%6%32%45%28%28%42%25%33%38 | The great global infrastructure opportunity© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  43. 43. The great global infrastructure opportunity | 39Less than US$250 millionUS$250 million-US$1 billionUS$1-2 billionUS$2-5 billionUS$5 billion+*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 201115%16%20%12%11%20%22%26% 33%11%7%27%24%36%21%29%20%20%12%16%Turnover of participants (USD)ASPAC (n=49)Americas (n=27*)EMEA (n=85)Overall (n=161)The great global infrastructure opportunity | 39© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  44. 44. 40 | The great global infrastructure opportunityAmericas (n=27*) ASPAC (n=49)EMEA (n=85)1-5 billion (n=58) More than 5 billion (n=24*)Less than 1 billion (n=79)Overall (n=161)Scope of operations of participants*Low base – findings are directional in naturePercentages might not add up to 100 due to roundingSource: KPMG International, 2011Region58%27%15%63%7%30%76%8%16%78%16%5%57%21%22%33%17%50%SizeDomestic (home country) market primarily Home region primarily Global64%18%18%© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  45. 45. The great global infrastructure opportunity | 41BookshelfA selection of relevant KPMG reports and insights.To access these publications,please visit: www.kpmg.com/building or email us at: gofmbuilding@kpmg.comConstruction Risk in NewNuclear Power Projects –EyesWide OpenThis report draws on the KPMGexperience, advising on new nuclearbuilds around the world.The reportfocuses on construction risks and sharesexamples of models in new nuclearpower projects. It also discusses othercritical considerations for investors.Power Sector Developmentin Europe – Lenders’Perspectives 2011A report highlighting the key findingsfrom a survey of top European banks onthe prospects for power infrastructurefinancing in Europe.Financing the growth ofyour cityA look at alternative financingmechanisms and structures for urbaninfrastructure financing.These financingoptions, including Public PrivatePartnerships (PPP), could help citiesgear up to not only meet the challengeof rapid growth but also become globalcities with world class infrastructure.Insight – Issue 1:Infrastructure 2050In the inaugural issue of Insightmagazine, we looked at the future ofinfrastructure and explored why theworld must come together to solve theglobal infrastructure challenge. Fromproject financing in Indonesia to urbantransport projects in the UK, Insightprovides a broad scope of local, regionaland global perspectives.Insight: Urbanization –Second EditionThe second edition of Insight exploresthe infrastructure challenges currentlybeing faced by cities, and includes featureinterviews with key city leaders andprivate sector executives from aroundthe world to shed light on how they areresponding to the infrastructure challenge.Infrastructure 100From KPMG and InfrastructureJournal – a look at 100 of the mostexciting infrastructure projectsunderway globally. A distinguishedgroup of judges selected thesegame changers from hundreds ofsubmissions.Project Delivery Strategy:Getting it RightWhat are the various project deliveryoptions available to owners?What arethe factors that might influence theselection of one method over another?This paper explores the options.Reaction Magazine:Fourth EditionA look at MA trends from both anemerging market and establishedmarket company perspective andexamines how MA activity maychange the shape of the global chemicalindustry over the coming years.Weconsider current trends in the globalconstruction industry and see howtax efficiency in the supply chain canprovide a competitive advantage.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  46. 46. 42 | The great global infrastructure opportunityPoweringAhead 2010:An Outlook for RenewableEnergy MAA report providing an insight into theglobal MA activity in renewableenergy.The findings are based on asurvey of over 250 senior executivesactive in the renewable energy industryworldwide.Success and Failure in UrbanTransport InfrastructureThis joint report with University ofLondon College explores the findingsof 19 case studies from cities aroundthe world, including NewYork, London,Hong Kong, Singapore, Dublin, Bogota,Manila, Manchester, and Bangkok.Rail at High Speed: Doinglarge deals in a challengingenvironmentMany countries are preparing and/orimplementing high-speed rail projects.This paper shares lessons learned fromwork performed by KPMG memberfirms advising Portugal’s first high speedrail project.DeliveringWater InfrastructureUsing Private FinanceWe examine the risks and rewards ofusing private finance to fund waterinfrastructure, including how municipalgovernments and potential investorscan benefit.Island economies and theirinfrastructure:An outlook2010 and beyondA first of its kind report on IslandEconomies, providing a comparativeanalysis of the state of the infrastructurechallenges currently being faced byisland economies.The Roll-out of NextGeneration Networks:Investing for 21st CenturyConnectivityA spotlight report on approaches beingtaken by governments around the worldrelative to the roll-out of high speedbroadband networks.Think BRIC! Key considerationsof investors targeting thepower sectors of the worldslargest emerging economiesA series of publications highlightingmajor trends and challenges shapingthe evolution of the BRICs countries’power sectors over the course of thenext decade.New on the Horizon: RevenueRecognition for Building ConstructionThis publication addresses the revisedrevenue proposals, specific to entities inthe Building and Construction sector.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  47. 47. The great global infrastructure opportunity | 43KPMG’s Global Building Construction practiceBy keeping a constant pulse on the industry, KPMG’sBuilding Construction professionals deliverin-depth knowledge and valuable advice to help companiesadapt accordingly in challenging economic times andbeyond.We understand the complexity of the engineeringand construction industry and have a keen grasp of thebusiness issues and challenges that exist in differentmarket climates. In addition, you can count on our objectiveperspective. Our professionals across the global networkcan help your organization improve business processes,control costs, identify and mitigate risks, increase visibilityand transparency, maintain regulatory compliance,and identify growth opportunities through internationalexpansion, merger or acquisition, or joint venture.2010 Global ConstructionSurvey –Adapting to anUncertain EnvironmentThis survey highlights the cautiouslyoptimistic outlook of many ECcompanies about their immediateprospects and discusses key industryissues and the measures adopted toseize the new opportunities identified.2008 Global ConstructionSurvey – Embracing Change?This survey presents the views ofCEOs and other senior executives onareas impacting the industry, includingresource shortages, risk management,escalating costs, and sustainability.KPMG INTERNATIONALAdapting toan uncertainenvironmentGlobal Construction Survey 2010kpmg.comGlobal Construction Survey 2008Embracing change?KPMG INTERNATIONALThe Global Construction Survey seriesThis is the sixth year of the KPMG Global Construction Survey. Here are the latest three reports released prior to 2012.They provide a great illustration of how the industry has evolved over the years.2009 Global ConstructionSurvey – Navigating theStorm – Charting a path torecovery?More than 100 senior executives fromthe engineering construction industryresponded to this survey, which focusedon how organizations were weatheringthe impact of the global financial crisis.KPMG INTERNATIONALNavigating the stormCharting a path to recovery?Global Construction Survey 2009© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. All rights reserved.
  48. 48. GenoArmstrongInternational Sector Lead,Engineering ConstructionKPMG in the UST: +1 415 963 7301E: garmstrong@kpmg.comMichaelW SamsonAmericasEngineering ConstructionKPMG in the UST: +1 713 319 3403E: mwsamson@kpmg.comPatrick PetitEurope, Middle East, andAfrica Sector Lead,Engineering ConstructionKPMG in FranceT: +33 155 687 080E: ppetit@kpmg.frSteven GattAsia Pacific Sector Lead,Engineering ConstructionKPMG inAustraliaT: +61 2 9335 7303E: sgatt@kpmg.com.auFor further information, please visit usonline at www.kpmg.com/building,email: gofmbuilding@kpmg.comor contact the appropriate geographic lead:The information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information isaccurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.The views and opinions expressedherein are those of the survey respondents and do not necessarily represent the views and opinions of KPMG International.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independentfirms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority toobligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any suchauthority to obligate or bind any member firm. All rights reserved.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Designed by Evalueserve.Publication name:The great global infrastructure opportunityPublication number: 110736Publication date: January 2012www.kpmg.com

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