Joint ventures critical to global construction recovery

The combined balance sheet strength of a JV-driven project is likely to appeal to contractors dealing with financial constraints in the aftermath of the pandemic. Investors are also likely to turn to emerging markets seeking higher returns, where they will benefit from local partners.

Our guide to delivering infrastructure projects through joint ventures provides a tool kit for the successful design and operation of JVs. The evidence suggests that more needs to be done to improve the way JVs operate to deliver infrastructure projects.

A construction-led recovery

The global construction sector experienced a slowdown in growth to 2.1% during 2019 prior to the pandemic recording its slowest rate of expansion since 2010. The slowdown was focused on industrial output and trade across advanced nations and particularly North America. Air freight, for example, fell in both 2018 and 2019 as freight volumes shrank in 2019 in all global regions other than Africa, according to the International Air Traffic Association (IATA).

The coronavirus pandemic began just as construction markets were showing positive signs of a rebound in early 2020. By the middle of 2020, the global economy had shrunk by 10% relative to its level just prior to the pandemic - far larger than the 2008 global financial crisis, where the global economy shrank by 1.1% in the year.

Although news is beginning to emerge of the effectiveness of the vaccines under development, the UK and larger European economies are back in various states of lockdown dealing with the pandemic while the US struggles with record numbers of confirmed cases. Permanent and substantive removal of pandemic restrictions globally is only likely to begin from mid-2021 onwards.

Investment-driven sectors including construction will lead rather than lag the economic recovery, and massive monetary stimulus by central banks around the world means that credit conditions will remain very accommodating for the foreseeable future. This is an important factor for financing construction projects.

Research shows that policy responses at a country level during previous modern pandemics, such as SARS and H1N1, can really influence economic performance and larger responses lead to a much lower loss in economic output five years on from the year of the outbreak. A lower policy response leads to a significant worsening of economic performance five years on.

The research shows that spending increases are much more effective than tax cuts in supporting real growth - a crucial point, as a high percentage of fiscal spending goes into infrastructure which boosts productivity and economic performance in the longer term. This can be seen in economic infrastructure such as roads, rail, ports and airports; energy assets that enable efficient production and transportation of goods to end markets; and social infrastructure such as hospitals and schools.

Why joint ventures?

In an economic upturn, we would expect to see higher growth in the formation of new JVs or the extension of existing JVs as spending drives new infrastructure projects. The reasons vary from market entry and targeting higher growth markets to combining specific technologies and capabilities or combining capacity and financial strength.

The main reasons why JVs are formed are considered fully in our guide, and are many and varied. The important point is that the infrastructure sector and its clients need to make a significant shift from bringing together JVs for capacity reasons to building coalitions of the best capability to deliver complex and innovative infrastructure projects. These infrastructure projects will form a key part of leading the world in recovery from the pandemic, and therefore designing for success is crucial in mobilising every dollar of stimulus spending and investment.

Improving productivity in the construction sector is vital. Construction productivity has remained virtually stagnant for decades, according to McKinsey; while productivity in the manufacturing sector has nearly doubled over the same period. To improve productivity, JVs will need to embrace:

• technology – there will be a huge acceleration in the use of technology to improve construction which to date has significantly lagged manufacturing and other sectors
• modern methods of construction – the nascent market in off-site manufacturing will become an explosive growth market. The manufacturing of various components to build infrastructure and even whole houses will be key to improving productivity. Reinventing construction as a manufacturing process is an important issue for JVs to consider
• supply chains – we will see a simplification of global supply chains over the coming decade, with less concentration in the manufacturing of construction materials
• corporate development – greater activity as infrastructure contractors look to acquire to enter growth markets, and acquire technology and manufacturing capability
• net zero carbon – governments in advanced economies will focus stimulus to help advance net zero targets - for example, to meet the 'green new deal' in Europe and similar targets in the UK. This will have an impact on JVs as investments and projects increase in size, together with the introduction of new technologies such as carbon capture and storage and hydrogen.

Join a panel of Pinsent Masons experts for our webinar Joint Ventures Delivery of Infrastructure Projects on 2 December.