The Competition Dilemma

 

THE COMPETITION DILEMMA

When it comes to large-scale infrastructure projects, there are many who think that the UK construction sector is underperforming. Terry Hill CBE FREng, Chair of Arup’s Board of Trustees, argues that a procurement strategy that sets specifications for performance, not solutions, could drive the needed innovation to revitalise the industry.

Free markets drive the best for society by providing continuous increases in value and ingenuity. Competition supports this continuous and self-sustaining improvement cycle across almost every sector of the economy. However, in the UK, one important exception is our approach to the procurement and delivery of transport, power generation, water supply and communications infrastructure from the construction sector.

Numerous indicators and enquiries show how the construction sector has underperformed historically compared to others. The 2010 Infrastructure UK Infrastructure Cost Review showed no overall long-term trend in the sector for cost improvements – although some cost savings have been achieved since then through improved collaborative working. In September 2012, the Department for Business, Innovation and Skills paper Industrial Strategy: UK sector analysis reported construction to be the largest yet least productive sector of the economy.

Terry Hill CBE FREng

Terry Hill CBE FREng

Why does competition not bring dramatic improvements in infrastructure when it does so in all other sectors? The required elements are all present. EU procurement regulations are followed rigorously. The use of the private sector to deliver public utility infrastructure is now universal, with well-run, often international large companies aggressively competing in an open and transparent market. And a majority of companies working in the construction industry are SMEs that in other sectors are the major source of research, patents and innovation.

In other business sectors, the competitive markets seem to work. Customers demand value; suppliers innovate in response. In the aerospace industry for example, passengers demand cheaper flights, airlines demand fuel- (and carbon-) efficient planes, and aerospace manufacturers produce dramatic increases in efficiency (40% since 2000). As a consequence, passenger demand increases further improvements. Regulation also has a major role to play as governments insist on increased safety and reduced pollution and carbon emissions. The vibrancy of the industry, and competition, drive the technological innovation to deliver these improvements.

Infrastructure projects in the UK, however, are characterised by stop-start, opaque investment programmes, poor governance structures, delivering to budgets rather than lowest cost to completion (termed out-turn cost), over-specification, and bureaucratic and hence conservative procurement. All of this leads to an industry that has among the lowest levels of investment in training, research and innovation.

There are some advances being made. Leading consultants and construction companies are once again regaining their confidence to invest in research and innovation and are achieving significant process improvements. But, in my opinion, none of this equates to transformation.

The Infrastructure Cost Review targeted a 15% cost reduction. To achieve this, it recommended an overhaul of procurement: improved collaborative behaviours, projects grouped into programmes, integrated supply chains and greater use of performance-based specifications. The government’s Construction 2025: strategy targets 33% cheaper, 50% faster and 50% greener performance. We need a transformation in our approach.

Consider other industries. Great advances have been made through the exploitation of new technologies: fly-by-wire and the use of composite materials in aerospace; advances in computer management of modern cars and resulting increases in fuel and emission efficiency in automotive; and the huge engineering innovation in offshore exploration and extraction and now fracking in the oil and gas sectors.

What differs from the construction sector is that in each of these industries, the main players are of a size that can take on the risk of a new airliner, a new car or a new oil field. Project risk and company size match: mega-projects, mega-corporations.

For construction, it is a different picture. The UK construction sector is an industry largely made up of SMEs. The largest construction companies are a fraction of the size of the oil, aerospace or automotive majors. Yet the size of the challenges are similar: metros or high-speed railways are the same cost in ballpark terms as the development of a new aeroplane or oil field. No current construction company (or designer) could take such a risk, and hence innovation progress is slow: mega-projects, modest corporations.

So a combination of very high project costs with a relatively low capital asset base and risk-averse commissioners (those who procure, own and operate infrastructure projects) leads to an innovation inertia where the procurement framework limits any scope for substantial technological innovation and true cost savings.

The solution is to put innovation at the core of procurement, and to shift the innovation risk for infrastructure towards the client and infrastructure owners. Specifying the required performance rather than the required solution is key to stimulating market-led innovation. For example, seeking bids to construct a new flood defence structure will produce a range of prices but is unlikely to stimulate innovative thinking other than in methods of construction. Seeking bids to protect people and property from the risk of future floods will generate a number of the same proposals but may also encourage a few radically different alternatives.

This way, society will benefit and the public and privately regulated utilities will be transformed. Government needs to re-examine its research and innovation funding priorities. While construction is one of the largest of the government’s eleven industrial strategies, there is no equivalent innovation funding compared to the seven technology and innovation Catapult Centres.

The construction sector needs help to deliver innovative solutions for the nation. Passing innovation risk down the supply chain to companies that are structurally incapable of taking on that risk is no solution. Instead, the prime responsibility for taking the innovation risk must lie with those who procure the projects, as they stand to benefit. Being bold enough to focus on performance and outcome rather than preconceived solutions is the most effective way to achieve industry transformation.

BIOGRAPHY

Terry Hill CBE FREng is President of the International Organisation for Standardisation (ISO) and a Trustee of the Arup Group Ltd.

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