Balfour CEO: Contractors should back off risky PPP schemes

Contractors should not diversify into markets fraught with risk, Balfour Beatty’s chief executive Leo Quinn has told Building.

Quinn’s comments came after Balfour reported that its UK construction arm had posted a £2m profit in the first half of the year, compared to the £69m loss it piled up in the first six months of last year.

He said the country’s biggest contractor was returning to being a “more normal” contractor which meant backing away from high-risk PPP projects.

He confirmed the firm was no longer actively bidding for energy to waste contracts – a market which has contributed to heavy losses at rival Interserve - and is now just working through its remaining contracts as that part of the business is wound down.

Quinn (pictured) said: “PPP…is full [of] risk […] The crux of it is you shouldn’t be playing in areas you don’t necessarily understand or you don’t have the capability.

“For example, if I take energy from waste, we see a lot of our people reporting losses in this area. When you’re a construction company what do you know about process risk and all the implications of that?

“It’s getting ahead of yourself and its having an ambition beyond your ability to deliver. And that’s where it goes wrong. Right at the strategic level in that you shouldn’t even be playing there.”

He admitted Balfour, which still has several energy to waste contracts, had found the projects “challenging” and added: “Many of these things are legacy. They go back five years and even further and part and parcel of the challenge is you just have to work through these things.”

But in its latest results, the firm said it was continuing “to see significant opportunities for future investment in its chosen geographic markets in the UK and North America, including any potential development of a PF2 pipeline in the UK and the new administration’s proposed PPP infrastructure investment in the US”.

Balfour on Wednesday posted improved results for the first half of 2017, including a pre-tax profit of £12m for the first six months of the year, which was more than the £10m profit it recorded for the whole of 2016 and up on the pre-tax loss of £15m for the first half of 2016.

The firm is also on course to achieve “industry standard” margins next year, Quinn said, adding that he was “pretty confident” Balfour would exceed those margins in 2019 despite Brexit and fears over hikes in materials and labour costs. “It’s been a long time since we’ve seen 2-3% margins,” he said.

Quinn said Balfour was currently contracting through agreed target prices with clients with contracts that provide more of a “50:50 in terms of gain, pain. So if we make excessive profits we give half back. If we make excessive losses we only pay half of them […] it’s more balanced in the outcome.”

He added the weakening pound against the euro was deterring foreign workers from coming to the UK. Traditionally, overseas labour has reaped the benefits of a strong pound when sending money back home.

“We do need a slightly stronger pound in our industry whereas manufacturing enjoys the benefits of the weaker pound,” Quinn said.