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Ferrovial

Ferrovial - Integrated annual report 2013 / Performance in the year

Construction Market in Spain

For the seventh consecutive year, the Spanish construction market has reduced its activity. The fall of nearly 10% has not slowed the rate of decline with respect to 2012. Nevertheless the weight of investment in construction in Spain in 2013 was down to 10% of total GDP, the same as the European Union average but much lower than the 2007 peak of 18%. This, together with the return to positive GDP growth rates in Spain in 2014, suggests the decline in the sector will slow to a consensus estimate of 4% in this year.

Civil engineering works have continued the contraction process started in 2010, with a fall in 2013 of close to 25%, due to the public sector’s need to balance the high public deficit. The outlook for 2014 is for the decline to persist, though less sharply, as anticipated in the Central Government Budget for 2014, where the Ministries of Civil Works and Agriculture, Food and Environment have cut investment by 9.5%. For the first time in recent years, we are starting to see indicators that anticipate an incipient recovery. They include 23% growth of public tenders in 2013 according to Seopan, though it may take some time for this to work through to growth in the sector, given the steep falls in public tenders in the 2010-2012 period.

The driving forces for public tenders in 2013 include the Ministry of Civil Works, with 34% growth that includes the 2012-2024 Infrastructure, Transport and Housing Plan (PITVI), with planned investment of 136.627 billion euro. The plan includes government investments of more than 52.000 billion euro on railroad infrastructure and nearly 40.000 billion euro on roads, as well as private investment on roads and ports worth more than 15.000 billion euro. These works should help to stabilize the sector in the medium term, although the Ministry of Civil Works forecasts that investment will continue falling until the turning point expected in 2015-2016.

The building sector reduced its activity in 2013 with a drop of just over 5%, similar to that of 2012, and without there being clear perspectives of recovery in the short term. For example, the housing sector will close 2013 with fewer than 60,000 housing permits, down 15% on the figure for 2012, which was already the lowest recorded since the early 1980s.

Ferrovial Agroman, like all major construction companies, has been affected by this difficult climate, with an overall drop in revenue in Spain of 25% in 2013.

The growing international component of Ferrovial Agroman’s activities, and its growth in 2013 by 5% at a constant exchange rate (2% at real exchange rate), has partially offset the reduction in construction activity in Spain.

The strategic positioning is based on a combination of key markets selected for their macroeconomic stability and legal security, which account for more than 85% of the international order backlog: The United States and Canada, highly stable countries that both have a significant infrastructure deficit; Poland, which will continue to be the leading recipient of EU infrastructure funds in 2014-2020; and the United Kingdom, with major infrastructure projects looming. Some highlights in those countries include the award of exceptional projects like the NTE Extension highway in the United States (approximately 735 million euro) and the M8 highway in Scotland (approximately 375 million euro).

Ferrovial Agroman’s presence and activity is also growing in countries where it has historically had a stable presence, and in others in which it has been opening offices in recent years with a view to a long-term position. For example, its activity extends to much of Latin America (Chile, Colombia, Peru, Brazil and Puerto Rico), the Middle East (Qatar, Oman and Saudi Arabia), Western Europe (Ireland, Portugal and France), Singapore and Australia. In 2013, it was awarded its first projects in Australia and Brazil, as well as major contracts in Oman for the Section 5 of the Al Batinah Highway for approximately 260 million euro and the Al Ghubrah Desalination Plant for 160 million euro.

United States and Canada

The United States accounts for more than 50% of the international order backlog and more than 1.2 billion euro in revenue. This positioning corresponds to both major PPP projects together with Cintra, such as the NTE and LBJ Highways or, more recently, the NTE-Extension, and D&B (Design & Build) projects directly for the end client, such as the Virginia US 460.

The country is fully covered from the offices in Texas (the second largest construction market in the country, in which the company is the leader in D&B concessions projects and through the civil works subsidiary Webber), the East Coast (Georgia) and the West Coast (California).

In the US, current investment in land transport infrastructure is financed to a substantial extent through federal spending. The national Moving Ahead for Progress in 21st Century Act (MAP-21) program approved in July 2012, is investing 108 billion dollars over a 27-month period ending in September 2014. Negotiations to establish a new long-term funding program began in January 2014.

In the 2013 Report Card of the American Society of Civil Engineers (ASCE), a negative score was given to the country’s infrastructure. It pointed to a need to invest 450 billion dollars annually from 2013-2020, of which 200 billion would not have funding. In response to this lack of funding, there has been a growing trend of the states toward public-private partnership formulas, in which Ferrovial Agroman has extensive experience with Cintra.

In Canada, through the office in the province of Ontario, work has continued on the major project of the East 407 ETR toll road extension, awarded in 2012 for more than 600 million euro to a consortium in which Ferrovial Agroman is a partner. New lower size contracts were awarded throughout 2013. The level of PPPs makes this market particularly interesting, as does the Federal Government’s support of infrastructure construction with plans like the New Building Canada Plan, which is slated to invest 47 billion Canadian dollars over the next 10 years.

Canada is also the largest global mining market and also has major investment plans in energy projects. Along with public works they make the country a highly attractive market for construction.

Poland

The Polish market is the largest construction market in Eastern Europe, where Ferrovial Agroman operates through Budimex, the country’s leading construction company, with revenues in 2013 totaling nearly 1.1 billion euro and a stock market capitalization of 811 million euro as of the close of 2013.

The first significant decline in the country’s construction activity was reported in 2013 after several years of growth (down around 10%, according to various analysts). The forecast for 2014 and coming years is again positive, with a gradual recovery expected, though it may be delayed until the end of 2014 or 2015, depending on the forecasters. In any case, the improvement is expected to take place in the short term, thanks to the macroeconomic upturn and the positive effect of allocation of European Union funds for 2014-2020, of which Poland will be the leading recipient.

Civil works was the activity most impacted, with an estimated fall of 15% due to the finalization of the 2007-2013 cycle of European Funds and the completion of the infrastructure for the European Championship in 2012. A more moderate fall is forecast for 2014 since the positive effect of the new European Funds should be felt as of the second half of the year. The allocation to infrastructure for 2014-2020 will rise slightly to 26 billion euro. Based on this outlook, in December 2013, the Polish government announced investments of 10 billion euro in 2014-19 on highways, which, together with the upturn in railroads as of 2015-16 and power station renovation plans, make the outlook for civil works in Poland quite positive.

Building also suffered a significant fall in 2013 of slightly under 10%. This was due to the slowdown of GDP growth, in line with the situation throughout Europe, the completion of building projects for the Eurocup and the weak housing market. The outlook for recovery for building is slightly weaker than for civil works.

United Kingdom 

The company’s presence in the United Kingdom, the third largest construction market in Europe in size, has been stable since the opening of the London office in 2006. The business has grown continuously, thanks to the company’s technical capacity, which has made it competitive in the market and has granted it access to major contracts both in partnership with investors in which Ferrovial has a stake (Heathrow Airport Holdings or special purpose entities through Amey or Cintra), or with other non-Ferrovial group clients such as CrossRail.

Its activity in the United Kingdom closed 2013 at an all-time high, with revenue over 400 million euro, an order backlog of more than 500 million euro and prominent projects underway, such as Heathrow’s East Terminal Building, 3 sections of the CrossRail railroad project and the integrated baggage system at Heathrow’s Terminal 3. Moreover, this stable presence has been consolidated with the award in 2013 of Scotland’s M8 highway contract for 372 million euro.

There are numerous opportunities for growth thanks to large-scale civil works projects, the majority of which are included under the National Infrastructure Plan announced by the United Kingdom Government in November 2011, which identifies 500 priority projects and plans worth a total of 250 billion pounds. The projects mainly focus on transport infrastructure (high-speed rail, subway, PPPs for roads, airports), energy (combined cycle plants, nuclear plants, gas incinerators, offshore wind farms) and water cycle management.

Stable revenues are expected for 2014, based on business being similar to that of previous years, with growth in international activity and continued decline on the domestic front.

Considering the backlog for 2013 and the planned volume of awards for 2014, the contribution of international activity is expected to be close to 80% of the total business.