Engineering Survey

 
 

Few industries appear as well placed as the engineering services industry. According to consultants Booz Allen Hamilton, the world’s urban infrastructure will need an extra $US40 trillion of investment over the next quarter of a century, just to modernise water, electricity and transportation systems. This equates with more than a quarter of the world’s current capital stock. Throw in the need to improve the supply chains that underpin globalisation, and the demand growth starts to look spectacular.

According to the management consultancy McKinsey & Company, the investment required just in public transport worldwide is $US9 trillion. Already, $US3 trillion is planned by governments, as they seek to develop systems that can cope with the growing pace of urbanisation.

Although the sums are huge, the capital should not be too hard to find. Pension funds and, increasingly, sovereign wealth funds are attracted to the stable and long-term nature of infrastructure investment, which typically generate 10-13 per cent for toll roads, 8-10 per cent for rail and passenger lines, and 10-14 per cent for waste water plants.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The availability of skills, however, may be more of a problem. Whereas capital is mostly homogenous and can be readily moved across borders, the engineering services industry is fragmented and increasingly subject to skill shortages. According to the consultancy IBISWorld, the world’s four largest companies accounted for less than a tenth of global revenues in 2007. Engineering service companies tend to be either national or regional, and deliver a narrow range of services, despite a trend towards greater consolidation over the last decade. Only about a fifth of global revenues are generated by firms which have operations outside their country of origin.

The nature of the engineering business sits in stark contrast with the infrastructure projects themselves. Infrastructure development is highly capital intensive, and heavily reliant on financial management and raw materials pricing for success. The engineering business, by contrast, is highly knowledge intensive. According to IBISWorld, labour costs, mainly employee compensation and contractor payments, absorbed 60 per cent of the sector’s global revenues in 2007. In the pricing and management of infrastructure projects, labour costs are typically of less importance than the management of materials and finance. But for an engineering firm it is the major consideration.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief