2016 Construction Forecast
By JIM BARNESFinancing Infrastructure P3s Risk Management Skills Development
The road ahead
Forecasting the construction business for the year to come is always a challenge, with imponderables such as geopolitical instability, economic turbulence, commodity price fluctuations and other “black swans.” This year is even tougher, tossing a brand new federal government into the mix.
Let’s start with the great big problem, the decline in the price of oil.
“Capital spending in the oil and gas sector is expected to drop by some 40 per cent in 2015, dealing a major blow to the non-residential and engineering construction sector – as well as support activities for mining, oil and gas – in the oil patch.”
That ominous quote comes from Provincial Economic Forecast, published by TD Economics in October. A modest recovery in crude prices is expected for next year, but nothing that would lead to a “V-shaped” rebound in growth, researchers say.
Not only did a lot of construction related to the oil patch go off the rails, but provincial economies lost access to those royalties to finance other construction projects. That was followed by growing unemployment and weaker consumer confidence in the affected areas.
Low oil prices are not entirely bad for the industry. The weak looney that resulted benefits exporters, especially in manufacturing. The U.S. economy is quite robust and Canada’s manufacturers are starting to get back on track as contributors to employment and the GDP. If the trend continues, industrial construction will benefit.
Costs are another possible benefit. There is downward pressure on fuel and material prices.
“Of course, the decline in price does not translate directly to savings at the fuel pump or in your next batch of asphalt,” points out Andy Manahan, executive director, Residential & Civil Construction Alliance of Ontario. However, he notes, “The inflation rate for construction will probably be within the usual inflation rate, but that’s hard to predict.”
THE NEW GUYS
Anecdotally, the construction industry seems to be feeling a lot of optimism about the new federal government. The Liberal Party campaigned with a very aggressive commitment to infrastructure, including a willingness to run deficits for a few years to grease the wheels.
In a nutshell, they committed to doubling the current federal infrastructure investment to $10 billion per year for each of the next two fiscal years and increasing the base infrastructure spend each year for the next decade. That translates to an increase of $9.5-billion annually, bringing the federal infrastructure investment from about $65 billion to nearly $125 billion. They also said a Canada Infrastructure Bank would be established to help finance infrastructure.
It was a popular stance. Infrastructure is widely accepted as an investment that offers considerable payback and surveys revealed wide public support for the notion of infrastructure spending as a way to kick-start the economy.
Political awareness of the value of infrastructure investment beyond political paybacks or job creation seems to have sunk in.
“An infrastructure deficit can decimate a nation’s economy just as much as a fiscal deficit can,” notes Michael Atkinson, President of the Canadian Construction Association. The Liberals also championed pushing the decision-making process down to the municipalities, promising to streamline the application process. In keeping with that commitment was the decision to drop mandatory P3 screening from projects valued at $100 million or more – an onerous and time-consuming procedure when a P3 did not appear to be an appropriate delivery mechanism and was unlikely to be used.
“The program has to be flexible,” said Atkinson. “The priorities at the municipal level are most important. They are the custodians of this infrastructure, they are the ones that have to set the priorities – the priorities can’t be set in Ottawa.”
If there is a fly in the ointment, it is the declaration by Finance Minister Philip Morneau that his government inherited a $3 billion deficit, not a $2 billion surplus, from its predecessors. “The simple truth is that the economy hasn’t performed as well as last projected in the last budget,” he said, predicting 1.5 per cent growth instead of the two per cent cited by the Conservatives. That puts pressure on Liberal deficit projections.
Even so, that is not an unreasonably large deficit and Atkinson cautions not to make too much of it. “The international community doesn’t look at whether a particular government is headed for a deficit or surplus one year or not. What they look at is the GDP,” he notes. “Is the economy growing?” You can manage your debt, but if the economy is not growing, you have not achieved anything.”
“There were a lot of good things learned from the previous (Building Canada) program – to have a one-page application so that you could actually get projects into the ground relatively quickly,” said Atkinson. “The Liberal government decided, quite prudently I think, to use the same infrastructure as the building Canada Plan – to use the same elements for the same kinds of infrastructure.”
Another developing trend is export. Many large Canadian construction firms already export services and expertise, in many cases to the U.S. Other markets are beckoning.
The Liberal government is reviewing the recently signed Trans Pacific Partnership (TPP), a trade agreement reducing or eliminating trade barriers among several Pacific Rim countries including Canada and the U.S. Construction procurement may well be on the table.
Export was a theme at the recent National Conference of the Canadian Council for Public-Private Partnerships (CCPPP) in Toronto. Besides a keynote by international trade lawyer Gary Horlick on the TPP, Edmundo Gamas, executive director of the Mexican Institute of Infrastructure Development addressed the gathering and a session was held on business in Southeast Asia as well as on the next generation of P3s in the USA.
The room was full of investment specialists looking for places to invest their assets and senior politicians eager to get more infrastructure into the ground. Issues such as transparency, risk and data analysis were front-and-centre. One session on project size was particularly illuminating. As the process is better understood, smaller P3 deals may become feasible… on the $50 million scale, as well as the $100 million.
Residential construction may soon be due for a breather, according to Canada Mortgage and Housing Corp.’s fourth quarter 2015 Housing Market Outlook, Canada Edition (published at the end of October). It calls for housing markets to moderate in 2016 and 2017.
“In 2015, increased housing market activity in provinces like Ontario and British Columbia – provinces that have benefitted from declining energy prices, a lower Canadian dollar and continued low mortgage rates – offset slowdowns in oil-producing provinces like Alberta,” said Bob Dugan, CMHC Chief Economist. “We expect, however, that this counterbalancing effect will decrease over time. As such, housing starts and MLS sales are projected to moderate in 2016 and 2017.”
CMHC expects 2015 housing starts to range between 162,000 and 212,000 units, with a point forecast of 186,900 units. F
or 2016, housing starts are forecast to range from 153,000 units to 203,000 units, with a point forecast of 178,150 units. In 2017, starts are anticipated to range between 149,000 and 199,000 units, with a point forecast of 173,650 units.
Non-residential and engineering construction are centre-pieces in provincial budgets across the country. The August issue of On-Site listed a number of billion-dollar projects that are in the works across the country (Billion Dollar Babies).
“Pretty much all the provinces have significant, ten-year plans for infrastructure investment,” said Atkinson.
Once again, one of the great challenges faced by the industry next year will be a familiar one… finding staff.
From 2011 to 2014, national growth was 62,400 jobs, while gains across the 10-year scenario period, 2015-2024, will be just 81,000 jobs, as noted in BuildForce Canada’s Construction and Maintenance Looking Forward, published in March 2015. However, demand created by expansion pales in comparison to the demand generated by upcoming retirements, the document says. As many of a quarter of a million replacement hires could be necessary by 2019.
“Meeting these demands from unemployment, moving the workforce across markets and provinces, and attracting Canada’s youth into construction will not be enough. An additional 100,000 new workers from outside construction – and likely outside of Canada – will be needed,” according to BuildForce.
“The availability of experienced, skilled workers and construction management personnel and trades is going to be a challenge,” said Atkinson. “I’m not talking about new entries… I’m talking about people with 10 or 15 years of experience.”
Many in the industry are optimistic about next year… but they are not letting that tamper with their sense of realism. “So far, so good,” said Manahan. “Everyone is saying the right things about spending money on infrastructure. We just hope it’s the right infrastructure – the stuff that’s going to give you the best return on investment.”
When all is said and done, 2016 does seem to present opportunity to the agile contractor. “We haven’t done any surveying, so anything I say will be anecdotal. But generally, I’ll say we err on the side of optimism that it’s going to be a decent year,” Manahan said.
“Overall, I think the prognosis for Canada, especially infrastructure sector, is still buoyant. Modest growth is expected,” noted Atkinson.
Jim Barnes is On-Site’s contributing editor. Send comments to email@example.com.