April 13, 2020
Global construction continues to be deeply impacted by geopolitics as issues, including nationalism, trade, supply chains, financing, labor, security, and the environment, affect the ability to complete projects, regardless of size or scope. Now, we face a new development: the global outbreak of COVID-19, a rapidly spreading virus that could affect billions of people worldwide.
Since first emerging in China, COVID-19 has spread across the globe, leading to the temporary shutdown of manufacturing facilities, a slowdown in shipments, labor shortages, and indicators of a global recession. These threats jeopardize the completion of construction projects from office and apartment buildings, to megaprojects such as nuclear power stations and high-speed rail lines.
COVID-19 has introduced a new level of volatility to an industry already shaken by the uncertainties surrounding issues such as Brexit, trade conflicts, plunging oil prices, financing uncertainty, and labor shortages.
“COVID-19 is dominating the headlines, and it is having an impact on the construction industry. As we watch the crisis unfold, we’re seeing shocks in the supply chain, and shortages of materials needed to start or complete projects. Concrete is in short supply, as is lumber and nails. Even the dust masks needed for demolition are in short supply because they’ve been bought by healthcare workers,” said Michelle DiGruttolo, a Senior Managing Director at Ankura, who leads the firm’s geopolitical advisory team.
Other concerns around COVID-19 include potential contract disputes, as a shortage of supplies slows progress on projects, and rising material prices. The crisis will disrupt labor, as workers may be restricted from entering project sites in certain jurisdictions.
As global leaders focus on containment, governments are using policy to mitigate the economic damage and hasten global recovery. Many of those rescue packages include infrastructure projects as an expedient remedy that garners multilateral political support. These projects are hidden opportunities for global construction enterprises that follow, understand, and monitor the geopolitical landscape. By the same token, the regulatory burdens that accompany these stimulus packages may result in unanticipated compliance costs. Robust geopolitical analysis and planning can help global construction companies stay informed, find opportunities, and avoid unnecessary risks.
A team of Ankura experts in geopolitics and construction has been assembled to discuss these issues from a global perspective and provide a close examination of key regions of the world: Asia, the Middle East, Europe, and the Americas.
- Michelle DiGruttolo, Senior Managing Director, Geopolitical Advisory
- Ben Burley, Managing Director, Asia
- Sean Allen, Senior Director, Middle East
- Matthew Finn, Managing Director, Europe
- Steve Pitaniello, Senior Managing Director, Americas
Our experts explore how geopolitics and globalization have created greater uncertainty in the construction industry. They discuss the rise of nationalism, the resurgence of “Great Power” competition, and the repudiation of globalization. Rapidly changing and ever evolving geopolitical issues create volatility and uncertainty in the global construction industry, creating new operating and investment risks. Our team discusses these challenges and potential hidden opportunities.
Before the rise of the COVID-19 pandemic, the world was faced with challenges in the political, economic, social, security, technology, legal, and environmental arenas. Among these challenges: growing nationalism, increased isolationism, falling oil prices, fears of a global recession, rising social unrest, national security threats, a fight for technological dominance, legal battles over technology, trade and anti-trust issues, and environmental concerns tied to climate change.
Current circumstance exacerbates these trends, especially as they relate to isolationism and the potential for a worldwide economic downturn. For more commentary on this topic, see our 2020 Geopolitical Forecast.
While COVID-19 could be faulted for initiating the stock market decline, it is not solely to blame, DiGruttolo said. It was the decisive factor in what DiGruttolo called a “perfect economic storm.” DiGruttolo explains, “We cannot discount the force of widespread popular anger over income inequality that many perceived to be a result of globalization.”
“As a result of populism, the U.K. separated itself from the EU and Washington began contentious trade negotiations with China and Mexico. For global construction, that means disruptions to the free flow of goods and labor into and out of Europe and the U.K.; a synchronized global economic deceleration that causes investors and financiers to curtail money flows,” DiGruttolo said. She continues, “The use of economic tools like tariffs, sanctions, and national security exemptions have increased construction costs, raised compliance risks, and interrupted the free flows of labor and supplies.”
Meanwhile, we have experienced a precipitous drop in oil prices. Russia refused to follow OPEC in cutting oil production to shore up prices in early March. Saudi Arabia responded by cutting oil prices and ramping up production. This punished Russia, but also hurt oil and gas producers from the U.S. and other countries.
Governments have responded with both fiscal and monetary solutions to the crisis to protect their individual economies, but unlike in the 2008 financial crisis, there has yet to be a coordinated global response to either the public health crisis or to the economy. “For the construction industry, government responses will have lasting impacts on financing, global growth, and availability of labor and supplies over the foreseeable future,” DiGruttolo predicted.
Taken together, DiGruttolo asserts that the deceleration of global growth stemming from isolationism, the impact of COVID-19, and the shocks in oil prices will translate into risks and opportunities for global construction companies, specifically in supply chain, business, labor, and financing disruptions. The industry must understand and embrace the importance of geopolitical analysis to forecast the possible scenarios global construction owners, lenders and contractors will encounter as they begin or strive to complete capital projects.
Geopolitical analysis shows the interconnection of different regions of the world, and how a development in one region can have ramifications across others. Examining geopolitical events by region can provide a broader global perspective and help identify trends that affect the construction industry. In this section, we consider geopolitical developments by region.
“Asian countries, primarily Japan, South Korea and China, financing construction projects around the world face different geopolitical challenges when it comes to project finance,” said Ankura Managing Director Ben Burley. “Since these countries typically have utilized their own contractors, labor, and materials to complete domestic construction projects, they face reduced risk to large geopolitical upheavals,” Burley said.
But Japan, South Korea, and China are more vulnerable in their financing of “outbound” construction and infrastructure projects, being built in other countries. For example, Japan is financing projects across South East Asia as is South Korea in the Middle East, including Iraq and Saudi Arabia. China has exposure in Central Asia, the Middle East, and Sub-Saharan Africa.
“If there are any political changes in any of these countries receiving finance, that could have a major effect on the commencement of new projects or completion of current projects,” Burley said. “Africa traditionally has been a politically volatile place which has led to debt restructuring or waived interest payments, and we’ve seen political changes in Malaysia lead to megaprojects being suspended or terminated.”
Historically, Japan established the model for outbound financing. After rebuilding domestically following World War II, Japan began a program of outbound financing to other countries, particularly South East Asia. “Japan finances projects for the development of the Japanese and global economy by supporting the socioeconomic development, recovery, or economic stability of developing regions. With an all-Japan cooperation throughout the supply chain,” Burley said.
After the Korean War, South Korea followed suit. “South Korea uses a similar model, with aims to facilitate the development of Korea’s economy and enhance economic cooperation with foreign countries. With policies such as promoting the participation of Korean companies including small to mid-size enterprises,” Burley said.
China’s model is like Japan and South Korea, although its investment is substantially greater through the Belt and Road Initiative, and the investments are more widespread across the world.
The Middle East is arguably the region where the steady march of construction could be significantly slowed by geopolitics. The region is home to many high-profile projects in the design or construction stages, particularly megaprojects such as new skyscrapers, rapid transit lines, airport expansions, sports and entertainment venues, and cities of the future.
These stunning projects face an obstacle course filled with perils such as reduced revenues due to falling oil prices, the threat of global recession, rising material costs, labor shortages, and COVID-19. “As impressive as these megaprojects are, they aren’t without their difficulties,” said Ankura Senior Director Sean Allen. He continues, “The Arab world seeks to cement its place on the world stage with increasingly complex and creative construction projects.” Here are some highlights:
FIFA 2022 World Cup
In anticipation of hosting the FIFA 2022 World Cup, Qatar is spending $6.5 billion to construct seven new stadiums and renovate an eighth, plus further expenditure building new hotels, roads, and other infrastructure to host an anticipated one million fans.
Work is being completed on four rail lines in Qatar’s capital city, a $36 billion project to create one of the fastest driverless metro lines in the world, with 41 stations across almost 60 miles of track.
Hamad International Airport is planning a second expansion, that will increase the airport’s capacity to more than 60 million passengers annually. The focal point will be an expansive indoor tropical garden in a central concourse.
North Field Oil
North Field is already the world’s largest natural gas field. A planned expansion will increase Qatar’s liquefied natural gas production capacity from 77 million tons to 110 million tons a year. The project is aligned with Qatar’s National Vision 2030, which aims for more sustainable development by 2030.
United Arab Emirates
Expo 2020 Dubai
Expo 2020 Dubai is a world exposition showcasing art, architecture, culture, science, technology, innovation, and invention. The centerpiece of the Expo is Al Wasl Plaze. The $7 billion project is designed to be a city of the future, with 80 percent of the infrastructure stated for permanent use.
Abu Dhabi International Airport
Work is being completed on a new $3 billion passenger terminal, dubbed Midfield Terminal. The new facility will boost the airports annual passenger capacity to 30 million, with the ability to expand that capacity to 60 million.
Etihad Rail Program
In 2009, the UAE began work on a national rail network for passengers and freight. When completed in 2024, the $10 billion rail network will span almost 750 miles and serve as a catalyst for economic growth.
The Saudi government is spending an estimated $500 billion to construct Neom, a “city of the future” that will be 33 times the area of New York City, and equal in area to the country of Belgium. Plans call for many futuristic features related to construction, transportation, and environmental sustainability.
Al Qiddiya is designed to be the capital of arts, entertainment, and sports. The $8 billion development, set to be completed in 2031, will include theme parks, stadiums, museums, and nature preserves.
Scheduled for completion in 2020, Jeddah Tower will be the world’s tallest building at 3,280 feet in height. The $1.4 billion tower will be the centerpiece of a 57 million-square-foot mixed-use development of residences, hotels, offices, and tourist attractions.
While these ambitious projects could propel the Middle East forward, Allen pointed out several factors that could constrain construction activity. First, in finance, historically, wealthy Arab oil nations have been able to fund much of the cost of construction of gleaming office towers, hotels, resorts, and entertainment venues. But the size and scope of these new megaprojects, coupled with reduced revenues from falling oil prices, is forcing Arab nations to seek outside financing. “As deep as the region’s coffers can be, they’re going to need a lot of private funding for these projects. And with oil prices tumbling, that’s also going to have a massive impact,” Allen said. Second, in labor, the sheer size and complexities of these projects is going to require significant labor and quality management which could be in short supply. Tensions within the region and COVID-19 could be barriers to attracting such resources. “There will be a question whether people will want to come, given the geopolitical tensions in the region. The tensions include those between the U.S. and Iran, Turkey and Syria, and civil disruptions in Lebanon, plus the coronavirus in the region,” Allen said.
Third, in materials, trade wars and the virus have slowed the production and distribution of building materials, threatening to slow completion of these megaprojects. “When you consider the volume of the materials required for these projects, with manufacturing in China decreasing, there will be a risk to the availability and cost of materials to deliver these projects,” Allen said.
A final potential barrier to the Middle East construction forecast is the region’s preference for contractors working under fixed price, lump sum contracts. These contracts typically create arguments over whether any additional works are subject to a “variation” – allowing the contractor to be paid extra for those works – or they are considered to be within the original scope and thus the contractor does not get paid any more than the fixed price.
“Lump sum contracts typically seek to place all the risk and pressure on the contractors, who are not always best place to manage such risks and so when those risks materialize, the Contractor can quickly find themselves in financial difficulties.” Allen said. “It becomes particularly challenging when trying to complete an ambitious project, where more things can go wrong. Some Tier One contractors are already struggling to deliver megaprojects across the globe on this basis and so may not be able to, or indeed want to, bid on these future projects on a lump sum basis. The region may have to rethink lump sum contracts in the future.”
Over the past few years, Brexit has created stress across Europe and the world. First, there was the battle over its passage in 2016, then the fits and starts as the U.K. prepared for Brexit’s rollout in 2020.
Now that Brexit has begun that rollout, it could cause labor shortages in the construction industry, as it might make it more difficult for workers to move in and out of the U.K.
“There is concern about the shortage of skilled labor to complete the construction projects: the bricklayers, carpenters, surveyors, and others” said Managing Director Matthew Finn.
Additionally, Brexit could erect new trade barriers that would make it difficult to receive needed construction materials. There are worries about material shortages caused by the U.S. and China trade conflict where the halt in imports from Chinese factories is a significant disruption to the supply chain. Now, Brexit has been overshadowed by the COVID-19 outbreak. It is causing greater uncertainty in the construction industry. “COVID-19 is already adding another layer of unpredictability to the current uncertainty being felt in both the U.K. and Europe,” Finn said.
Labor is another worry. A recent survey from the European Investment Bank showed that companies believe that the greatest barriers to investment in the European construction market are a shortage of skilled labor, labor market regulations, and general uncertainty within the markets. Similar to the concerns in the Middle East, these issues are poised to have the greatest impact on those megaprojects that require a significant amount of skilled labor, materials and finance.
High Speed 2
HS 2 is the second high-speed rail line to be built in the U.K., a 345-mile network that will link the cities of London, Birmingham, Manchester, and Leeds. The $75 billion project, stated to be completed by 2040, will also link onto the existing railway to serve further towns and cities in the north of England.
Crossrail, also known as the Elizabeth Line subway, is a $20 billion project that will cross London from Reading east to Shenfield, with links to Heathrow Airport and Abbey Wood. The 73-mile line is scheduled for completion in 2022.
Hinkley Point C
The Hinkley Point C power station is the U.K.’s first new nuclear power plant in more than 25 years. When completed, the £21.5 – £22.5 billion project will provide additional electricity to six million British homes.
If potential labor and material shortages were not enough to impact Hinkley Point, the project also was recently impacted by COVID-19 when China General Nuclear, that owns a 33 percent stake in the project, discovered that one of its employees contracted the virus. “Staff was stopped from flying back and forth from China after a report of a case of a worker on the Hinkley project contracting COVID-19 on a return trip from China,” Finn said.
Perhaps it comes as no surprise that in the Americas construction market, the three most important areas of focus are financing, labor markets, and supply chain.
Geopolitics knows no boundaries. “It’s interesting how similar the challenges in the construction industry are across the different regions of the world,” said Ankura Senior Managing Director Steve Pitaniello.
In the U.S., there is a need for financing to fund megaprojects that include roads and bridges, oil and gas projects, power plants and rail lines. In Canada, many megaprojects center on the oil and gas industry. The forecast calls for public megaprojects to continue to receive funding, but at a lower, and slower rate. It’s expected that financing of private megaprojects will slow as investors look for more secure funding. And the deep decline in oil and gas prices could have an impact on the financial markets and funding going forward. “How will prevailing circumstances around the world impact our capital markets and alter funding in the private sector?” Pitaniello queried.
With respect to labor, the American construction industry shares the same concerns as the rest of the world. Consider a recent survey by the Association of General Contractors that showed the top concerns related to trade labor are worker quality, worker shortage, and rising labor costs.
The shortage of labor is the most sobering feature in the current landscape. A U.S. Bureau of Labor Statistics report showed that over the past decade, there is a widening gap between the number of construction positions available and the number filled. “The need for skilled labor is far outweighing the supply,” Pitaniello said. “How do we execute the projects – already under construction and in planning – that contractors have signed up to deliver within a given budget and a timeframe?”
These labor shortages will cause an increase in:
- Wages as competition for labor intensifies, especially qualified labor.
- Construction costs, and the length of time to complete projects.
- The need for modular design, prefabricated construction, robotics, and other technological enhancements.
- The demand to address labor shortages through immigration.
Megaproject construction in the Americas will be also impacted by disruptions in the global supply chain. With the U.S. involved in sanctions with various sovereign nations, there have been slowdowns in material deliveries, that inhibit the completion of construction. U.S. manufacturing, particularly the steel industry, has been given the opportunity to pick up the slack for shortages, but it’s uncertain if domestic production has the capacity to make up for the shortfall.
Then there is the wild card in the form of COVID-19. It has already impacted factories in China and has slowed manufacturing and trade as it has spread across the globe. “As COVID-19 impacts all areas of the world, we’re going to see upward pressure on material pricing and supply, and the downward pressure on construction is yet to be known,” Pitaniello said.
Summary – Brave New World
Even before the new virus began to dramatically alter the way we live, the global construction industry was faced with a number of challenges to growth. Intensifying nationalism, isolation, and trade disputes resulted in supply chain disruptions and a rise in the cost of materials needed to construct office, apartments, roads, bridges, rail lines, and power plants.
COVID-19 only added to the challenges by halting manufacturing in China, and thus, the delivery of key construction supplies to the world.
The shortage of skilled labor in many corners of the world will challenge the completion of projects of all types. With people restricted to their homes and severe restrictions regarding travel across borders, the short-term labor shortage will only increase.
Falling oil prices and an economic slowdown caused by the virus threatens to spur a global recession, that will slow financing, postpone the start of new projects, and delay the completion of existing construction.
These threats can be addressed through thoughtful leadership and a spirit of cooperation. Through geopolitical analysis we come to a better understand the interconnection of nations, and possible solutions to challenges in the construction industry across the globe. Geopolitical analysis is a comprehensive examination of the political economic, social, and environmental factors that can affect the successful outcome of a construction project.
Ankura’s Michelle DiGruttolo likens geopolitical analysis to the ability to identify “wild cards,” those unpredictable events that are “somewhere in the deck, but we don’t know when or where they will appear in our hands and we cannot know their economic value in advance.”
Ankura, with over 30 offices throughout the world and expertise in in every major construction market, assists its global clientele in identifying and mitigating geopolitical risks on capital projects.
3 Key Questions at the Intersection of Geopolitics and Construction Projects
At the end of the Ankura Construction Forum webinar, Geopolitical Insights on the Future of Construction Projects, our roundtable of geopolitical and construction experts from around the globe answered top of mind questions on how the current geopolitical environment is affecting construction projects.
How can political transitions affect projects?
Michelle DiGruttolo: Political transitions, more than any other factor, have the potential to affect projects in ways that we often cannot anticipate if we’re not thinking about them. For example, the Arab Spring (2010-2011), while unanticipated, was the reason for Vision 2030 in Saudi Arabia, which is a great plan for the country to become oil independent. Saudi Arabia plans to provide and deliver essential goods and services to its population as part of Vision 2030, and the development of a substantial number of global construction projects is part of that vision.
Another example was the uncertainty that followed President Trump’s election and the subsequent transition from eight years of Barack Obama’s Democratic administration to the new Republican administration. Trump’s administration has focused on different priorities that created considerable uncertainty such as that from trade conflict. The renegotiation of NAFTA made investors very hesitant to commit to long-term projects, not knowing if the same rules would apply in the years to come or if there would be changes to NAFTA such as sundown clauses.
Lastly, the case of Brexit, another political transition which was largely unexpected when voters in the U.K. approved the exit from the EU in June 2016. The terms of the exit, which are still under negotiations despite the official exit from the EU in January 2020, are proving much more difficult to achieve – and will likely continue to upend the markets for years.
Why is geopolitical risk important to consider when planning global construction projects?
Michelle DiGruttolo: Geopolitical risk is very important for companies to take into consideration during the planning phase, because if it is done early on, they can map out the landscape and identify these risks to make sure the companies are properly insured or hedged against them. This can save money, help anticipate problems before they occur, have mitigating strategies already developed, and can aid in minimizing risks to on time and on budget completion. Failure to do so creates cascading risks that multiply and compound each other.
Steve Pitaniello: To add to that, because of what’s happening with these major issues relative to risk management, and looking forward at the geopolitical issues Michelle identified, I think many owners and contractors develop their risk register at the start of a project and through a project – it evolves. What’s happening now, looking in retrospect, is a lot of discussion around active projects and determining if there is delay impact due to COVID-19 supply chain disruptions, and how are contractors protected through their contract, relative to what they owe the project owners. In addition, contractors and owners will be determining whether the contract clauses relative to supply chain impact consider COVID-19 a force majeure event, and how such impacts to ongoing projects effect where the risk is allocated for these events. Are the risks for such unexpected events shared between the owner and the contractor? Or are they, via contract, borne by the contractor? How much delay was on the project prior to a supply chain and/or COVID-19 impact? These are the questions that are going to come up in the next few months, and over the course of the rest of the year as well, relative to delays, impacts, and who or what is responsible. Ultimately, the questions of when will the project be completed and how much will it cost will have to be answered and the responsibilities for delay and additional costs will more than likely be disputed.
Sean Allen: What I would add to that as well is the issue that I have in the Mid-East with fixed-price lump sum contracts. How can a contractor possibly foresee the impact of all these potential events and include that within its fixed price at the time in a competitive environment when they are trying to bid and win a project? The real issue with fixed-price lump sum contracts is that it puts the contractor under a lot of stress to include sufficient risk within its price to safeguard itself financially if such risks materialize, but at the same time, remain competitive. There must be a better way to look at contracting on megaprojects if they are to remain successful, because they are becoming bigger, more complex, and more ambitious, creating a harder job for the contractor to include sufficient risk allowances and submit a successful tender.
How can global construction companies identify and mitigate geopolitical risk going forward?
Michelle DiGruttolo: Building geopolitical risk into the planning and selection phase can help clients and businesses through scenario developments, where you can do stress testing, potential modeling, and forecasting. It’s important to quantify and game-out the quantitative risk in terms of financing, including potential wildcards that could have the ability to derail financing or even slow down the economy or would make investors hesitate to put money forward. Modeling and scenario development can forecast different labor markets and determine ways they may go. You can also model issues similar to the U.S. visa limitations and immigration changes that have had an impact on different sectors and industries. Lastly, you can model alternative supply chain disruptions, shocks, and operations, where we can say if said event happens in option A, China, it will have effects X, Y, and Z, but these effects can mitigate by moving these supply chain issues to options B and C.
 Jackson, David, and Maureen Groppe. Trump Says Another Coronavirus Stimulus Should Include up to $2 Trillion for Infrastructure. 31 Mar. 2020, www.usatoday.com/story/news/politics/2020/03/31/coronavirus-trump-wants-2-trillion-infrastructure-new-plan/5094399002/.
 Factors impacting long-term investment decisions in Construction, EU countries, European Investment Bank – EIBIS. Retrieved from https://data.eib.org/eibis/download