Impact of government spending on Balfour Beatty operations

Balfour Beatty, founded in 1909, is the 19th-largest contractor in the world, and a highly-respected firm that designs, engineers and manages large infrastructure projects all over the world, including the UK, U.S., Europe, Australia, South America and the Middle East. It has over a century of experience in building highways, railroad, power plants and utilities, including the National Grid in Britain. For decades, the company has been very active in overseas infrastructure projects such as railroads, tunnels, bridges, water systems and utilities in many nations, and participated in the construction of high-prestige projects like the Channel Tunnel and Hong Kong Airport (Balfour Beatty Company History 2011). This company has 50,000 employees in over 100 countries, from the U.S. And UK to Africa, Asia and the Middle East, and is a leader if the management of highways, utilities and public facilities. Through its partners and associates, it can offer services along the entire supply chain from initial concept to whole-life management of infrastructure projects (Balfour Beatty Strategy and Vision 2011). It has weathered the current recession quite well due to government stimulus funding and infrastructure spending around the world, at a time when private capital markets were mostly flat and declining. Balfour Beatty may face more challenges in the future if conservative governments reduce spending or attempt austerity measures while private sources of funding for major construction projects remain in the doldrums.

Private Finance Initiatives (PFIs) are a subset of Public-Private Partnerships (PPPs) in which infrastructure projects are funded with private capital. Since the 1990s, these have been the preferred method for public infrastructure spending in the UK and Australia, especially under conservative governments, but also New Labour. Essentially, the neoliberal theory of PFIs and PPPs has been that the private sector is simply more efficient and cost-effective than the state. In recent years, with the severe shortage of private capital because of the global recession, the logic behind PPPs and PFIs has become highly controversial since governments have ended up funding supposedly 'private' projects, and their obligations to these will last for decades with costs in the hundreds of billions. Balfour Beatty participated in its first PPP in Britain in 1995, and later in the privatization of the railroads after 1998. It is now involved in 31 PPPs in the UK, 18 in the U.S. And one in Singapore. In Britain, its PPPs include schools, hospitals, roads, street lighting, the Blackpool and Exeter International Airports, the Barking Power Station in London, while in the U.S. It provides long-term military accommodations (Balfour Beatty Group Structure 2011).

Balfour Beatty designs, builds and maintains hospitals and educational and health care facilities in the UK and U.S., including major medical centers. It has constructed over 200 projects in the U.S. since 1974, and its subsidiary Consult Health Care is a leader in PPP hospitals in the UK, such as Birmingham New Hospitals. It also built the new University College London Hospital, which has over 2,000 rooms and twelve operating theatres, and owns a one-third share. This project was completed on time and budget in 2008. In education, Balfour Beatty has built over $20 billion in school, college and university projects in the U.S., and also works with many local education authorities in the UK. In Singapore, it constructed the new Institute for Technical Education with facilities for 15,000 students, and with Jardine Matheson in the fist PPP model project in Southeast Asia, will manage the building for the next twenty-seven years. In Seattle, it constructed or renovated the public school buildings in a project worth over $1 billion, including a new geothermal power system, and won an award for Best School Construction Program in 2003 (Balfour Beatty Markets 2011).

Balfour Beatty is the world's leading firms in the construction of railroads, airports and public utilities. It has railroad projects in over twenty countries, including power supply, high-speed rail, metros, and light rail in Europe, the Americas, Asia and Australia. It constructed the 345-kilometer high-speed rail link from Taipei to Kaohsiung in 2007, and maintains the tunnels, workshops, depots and train stations. This project used Japanese-built trains with speeds up to 300 kilometers per hour. Among its many airport projects are Gatwick, Glasgow, Heathrow, Edinburgh, Dubai and Miami, with contracts for improvement, expansion and maintenance. It built the terminal building in Hong Kong and the terminals, parking garages, runways and utilities and the Reagan National and Dulles Airports in Washington. Balfour Beatty is the leading supplier of power transmission and distribution in the UK for the National Grid and Scottish Power, and also for nuclear power and underground cables. It built the largest generating station in Queensland, Australia, with power for one million homes (Balfour Beatty Markets 2011).

When governments follow Keynesian or social democratic policies to stimulate the economy in a recession, as the Obama administration did for example, then construction companies like Balfour Beatty can expect to benefit since there will be more direct government spending to stimulate the economy by building of repairing highways, railroads, power plants, port facilities, air terminals and many other types of infrastructure projects that will have a Keynesian multiplier effect and create jobs. In addition, more government spending on social welfare and education will also benefit the company since school and hospital construction are a leading part of its portfolio. Conservative governments that cut back social spending and reduce funding for infrastructure projects or impose austerity measures would reduce Balfour Beatty's profits, especially at a time when private equity investments are still much reduced from their pre-recession levels. Construction firms are almost Keynesian by nature since expansionary fiscal and monetary policies always improve their bottom line, whether in peacetime or wartime. By the very nature of their business, the largest contracts will always be infrastructure projects funded in whole or in part by governments, and so it has been for 100 years or more.

Chief Executive Ian Taylor, who was appointed to the position in 2005, sounded an optimistic note about the company's prospects despite the difficulties of the recession over the last three years. In 2010, Balfour Beatty's growth stood at 8%, its investments in PFIs showed good returns and its cash position was very strong. All the major parts of the group were now in place, enabling it to compete on a global scale and giving it a capacity that none of its peers had worldwide. Even under the current Conservative government, there would still be opportunities in utilities and power infrastructure,, while the company was also very interested in the emerging markets in India, Asia and South America, as well as expansion in the extractive industries. Although the last few years had been challenging, and the UK government was reducing education expenditures, it was going to maintain funding for transportation and power infrastructure. Taylor expected a recovery in bank financing and the private commercial markets, and was watching the U.S. government carefully, although after the 2010 elections he expected less government spending there and an increase in private financing. Balfour Beatty was also working very hard to improve the overall cost efficiency of its business (Balfour Beatty Home Page, 2011, http://www.investis.com/balfour/2011-03-03/ian-tyler/index.html).