Not such a distant horizon

Britain's love-hate relationship with Europe was highlighted last week by the mixed reactions to the news that Amec has initiated talks with potential Continental partners as part of a wholesale review of its business strategy.

Seemingly tired of being a big fish in a little pond, Amec wants to stride onto the world stage through a series of acquisitions and alliances on the Continent (CJ 12 September).

While the proposed Euro-move mystifies some commentators, who believe that southeast Asia is the happy hunting ground for British companies and talk of a "stagnant" European construction market, other contractors saw Amec chief executive Peter Mason's revelation as a reasonable way ahead.

They say that there are precedents for a loose, strategic alliance between European contractors. They also note that eastern Europe offers future market growth, once its financial problems are finally sorted out.

It is the latter point that could open the door to greater British involvement in eastern Europe which, to be effective, can only really take off through Germany due to the very real historical trading links in the region.

Fortunately for Amec, it already has a local presence through the acquired building & civils contractor, Kittelberger. To emphasise the relative priority of Germany in Amec's sights, it should be noted that the company dumped its construction interests in France and Portugal last year.

It is obvious that the public purse is empty in eastern Europe. The region sorely needs money for infrastructure development. Those contractors with the nous to help arrange private finance for infrastructure needs will, of course, have the best business prospects - as long as the local populations have the cash to pay for the services.

Consequently, British PFI-trained contractors - who know the debt-equity ropes of pulling together project finance deals - could be well placed, suggests a source at the German contracting group Philipp Holzmann, one of the top-three contractors in Europe.

Holzmann knows its onions on the project finance front, after helping to pull together deals like the huge Birecik hydropower scheme in Turkey and its PFI presence in the UK via the Connect Group roads consortium.

Putting himself in the shoes of a hypothetical British contractor, CJ's source says that from that perspective he would see the best long term potential in eastern Germany and eastern Europe. "The advantage would come from being able to bring the ability to organise private financing for infrastructure, such as toll roads, sewage treatment works and so on," he says.

While these points will not be new to many British contractors, especially those who tried their hand in the territory following the fall of Communism, things have changed.

The initially booming east German market has fallen quiet due to financial reasons - western Germany being unable and partly unwilling to stump up any more development funds.

Consequently, the "trickle-over" effect of the construction bandwagon to eastern Europe has slowed dramatically.

But what is also different now and may tilt the balance more towards Britain's favour is the new understanding of the needs and demands of project finance, a relatively recent discipline to hit Europe. With it comes a service mentality, much akin to the benefits of partnering, and a better appreciation of risks and how to manage them.

As such, those multi-skilled contractors with project finance experience and the urge to break out of their UK boxes may do just that. Amec's strategic review of its future plans and its involvement with the Road Management Group, which took the relatively unusual move to include Eurobonds in some recent project financing deals, should be read in this light.

"The Continent is an untapped source of future growth which can be used as a springboard for further expansion," says a spokesman for Amec, commenting on Mason's strategic review of the group's operations, due to be completed before Christmas.

However, all this has to be seen in perspective; there is another side to the coin. Earlier this year Kvaerner tried to take over Amec and after a bitter struggle the Scandinavian giant was finally fought off. Therefore, Amec's apparent desire to tie-up somehow with a Continental partner could be viewed as self-defence as well as reasonable business positioning to both catalyse private projects and take advantage of the future market growth in Europe.

But that noted, why do other contractors pan the idea of moving in to the Continent? Last week, Taylor Woodrow Construction chairman Mike Laycock was cool about the Amec revelation about the Continent.

He said: "I wouldn't sing from the same song sheet as Amec." Neither the Continental market nor alliances with Continental contractors are priority for Laycock.

Ian Grice, managing director of Alfred McAlpine Civil Engineering and its overseas operations, told CJ that the Continent was "not a very exciting prospect." As such, Grice is looking to the Far East and the Middle East as a stamping ground. Within Europe, he plans to further develop its niche market capabilities in Britain, such as in facilities management and PFI.

"It's very difficult to break into a mature market," said Grice, "and the cultural barriers remain in place for years afterwards." However, cultural barriers may only be a real problem if a contractor tries to have its own operation on foreign soil.

The problem may be overcome by buying shares in foreign contractors which also gives local market experience, just as Holzmann did with its stakeholding in Tilbury Douglas prior to going into PFI via the Connect Group.

Again, the Holzmann source expects this pattern to emerge for long term business expansion "from both sides of the Channel."

Another way for British contractors to access Europe, in fact to benefit clients anywhere - especially at home - is through partnering.

This is the belief of Tony Evans, chairman of the European Construction Institute's task force on partnering. He says that it can give a client more certainty on costs, completion date and can drive costs down.

Evans believes that the discipline and new culture of partnering will bring more much-needed benefit to British contractors than Continental, due to the more adverserial climate in Britain.

Appreciating risk more, British contractors will be on better terms with the City. As such, those who plan to venture further afield chasing big private finance schemes may actually be able to pull it off, he agrees.

He also has an insight into how relationships can develop on the Continent with foreign contractors through Laing's involvement in SEC strategic alliance with Germany's Strabag, France's Dumez-GTM and Sweden's NCC. Various pairings teamed up for the Oresund crossing and the Second Severn Crossing.

The strategic alliance approach is, by its very nature, project specific and it is big projects that will drive Euro-market opportunities, just like in the Asia-Pacific region. The Export Group for the Constructional Industries agrees. It says that contractors will move in anywhere for jobs more than œ30 million.

However, if public money is not available in such sums or the economy is not healthy enough to support many private sector projects of that size and above, private finance will be wanted. Whether it comes or not depends on the abilities, strengths and strategic goals of contractors.

Therefore, while Euro super-contractors might appear to be reasonable in principle, market conditions seem to rule them out. Consequently, British contractors with Euro-aspirations may succeed on the back of strategic alliances which have project finance strengths, built on strong balance sheets. If so, Amec may not be the only PFI contractor to eye up the Continent and may eventually show that British companies do not always have to go to such distant horizons as southeast Asia to win work.