Consulting engineering in Europe in 2016

Transcription

1 Consulting engineering in Europe in 2016 Peter Boswell Bricad Associates, Switzerland Survey website: survey.peterboswell.net The consulting engineering industry helps shape communities and indeed the entire built environment by providing the technology-based intellectual services needed in planning, assessing, designing, constructing and eventually refurbishing the building, facilities and infrastructure that make up our everyday lives. The industry supplies a wide variety of services vital to our social, economic and environmental quality of life on a fee-for-service basis to both the public and private sectors. Given the breadth and depth of the industry s activity throughout construction, architecture, urban planning, industrial production, management consulting, facilities management, information technology, inspection, and training. it is extremely difficult to estimate accurately the demand for the industry s services. Such estimates not only help demonstrate the industry s importance and role but also provide the basis for identifying business opportunities. 1.Top-down approach The FIDIC-EFCA Consulting Engineering Industry Survey aims primarily to provide accurate forecasts of the demand for consulting engineering services. It uses a top-down approach based on estimating the demand for services generated by investment throughout national economies. In contrast with bottom-up surveys of economic activity, top-down approaches have the advantage that they are able cover the many areas of economic activity which call upon consulting engineers. Moreover, top-down approaches allow forecasts of economic investment by statistics agencies responsible for national accounts to be used to estimate the demand for consulting engineering services. A well-established measure of investment is Gross Fixed Capital Formation (GFCF) that represents (gross) changes in an economy s capital stock. More precise estimates of investment expenditure that include for example the purchase of second-hand equipment are rarely available. For consulting engineering services, it is reasonable to use GFCF taken from national accounts as the basis for analysis because most of the industry s services relate to investment in new-build construction, in plant and equipment, and in renovation and maintenance that prolong the capital life of built assets. 2.Market-sector investment Establishing the investment (GFCF) requiring consulting engineering services is fairly straightforward. The demand for services is generated by investment in construction, plant, intellectual products (IP), and own-account design. 1

2 Fig 1 - The System of National Accounts groups enterprises according to control (private, public) and market criteria (market, non-market). Consider first the market sector (Fig. 1) comprising private enterprises and public corporations or state-owned enterprises: Publically owned public corporations are included in national accounts if they meet certain market criteria such as charging economically significant prices covering more than 50% of the production cost. A major exception is countries such as the US and Canada where public market sector activities are treated as separate industries and are not spread across several economic activities. For instance, in the European Union s 2015 European System of Accounts (ESA2015) that is closely related to the 2008 UN System of National Accounts (SNA08) the postal system is included in the transportation sector in the national accounts for the 28 European Union (EU) Member States Construction investment In the case of construction investment it is assumed that a) all of the investment requires consulting engineering services, and b) the new-build investment given by national accounts needs to be adjusted to include repair and maintenance (R & M) as opposed to renovation which definitely prolongs the life of a built asset and is included in national accounts. Under SNA08, construction GFCF is reported for dwellings and for other buildings and structures. A detailed analysis has shown that the GFCF for the R & M of dwellings in the EU28 varies from 10 to 50% depending upon the way each country treats renovation and maintenance in its national accounts. Second, the investment in buildings in the Other building and structures GFCF must be added to the investment in dwellings to give the total investment in buildings. This investment in buildings is determined by removing from the Other building and structures GFCF the investment in construction in the four sectors that mainly involve in infrastructure, namely education, health, transport, and utilities (this approach, with an adjustment to include construction investment in the four infrastructure sectors, was developed by the European Investment Bank). While the buildings component of the Other building and structures GFCF is assumed to have the same investment in R & M as dwellings, the infrastructure component requires an additional 55% of new build investment for R & M for education, health, and utilities (the figure of 55% is taken from surveys of US infrastructure) and an amount given by OECD data for R & M in the transportation sector Construction investment In the case of industrial investment, there are two main components, namely investment in plant and equipment and investment in intellectual property. For the plant component, adjustment for R & M of plant GFCF taken from national accounts is not required. However, in the case of the EU28, on average only some 65% of plant investment requires consulting 2

3 engineering services (the percentage for each country is given by OECD capital investment data for fixed assets by activity and by asset). The percentage is adjusted to give the investment as a percentage of the total investment in the various sectors of economic activity that require consulting engineering services. Adjustments are also needed to remove investment in software and computing equipment that does not generate a demand for consulting engineering services. It should be noted that from about 2010, most of the EU28 countries have followed SNA08 and ES2010 by including defence systems in plant GFCF Intellectual property With the introduction of SNA08 and ESA2010, research and development (R & D) is capitalised under intellectual property (IP). For the IP component, the main issue is to establish how much of the large GFCF attributed to R & D generates a demand for consulting engineering services. National accounts are published as Supply-Use Tables (SUT s) three years after the end of each annual accounting period. By reconciling and balancing annual estimates of expenditure, income and production in current prices through a supply and use framework, SUT s provide definitive estimates of macroeconomic indicators such as Gross Domestic Product (GDP). SUT s showing where goods and services are produced and where they are used in intermediate consumption, final consumption, gross capital formation, and exports are therefore a core feature of the national accounts system. It is assumed that the percentage of the R & D GFCF that requires consulting engineering services is given by the contribution to total GFCF given by the R & D product in Supply- Use Tables (ESA2010 SUT s classify products using the Classification of Products by Activity where the R & D product is denoted as CPA_M72). In addition to R & D, IP GFCF includes mineral exploration and evaluation. Expenditures on mineral exploration are classified under SNA08 as contributing to GFCF since mineral exploration creates a stock of knowledge about the reserves that are used as input in future production activities. There are also own-account mineral exploration services carried out inhouse by firms inside and outside the mining industry that are not traded in the market but which need to estimated as they represent a demand for consulting engineering services. On average, mineral exploration and evaluation accounts for some 0.05% of total GFCF Own-account design The last component of the investment requiring consulting engineering services is ownaccount design. Own-account design is design by economic activities other that the activity undertaking the design: it is not included in national accounts. A demand for consulting engineering services arising from this investment will mainly arise from investment in new architectural and engineering designs (AED) for both construction and plant investment. It is noted that national accounts do include some investment in new design, including new processes and systems. For example, architectural and engineering services can be capitalised when these costs are embedded into the acquisition of a recognised asset. 3

4 The EU INTAN project database gives the AED GFCF for 11 EU countries. This investment includes general design (by graphic, product and clothing designers) but excludes software design. The investment in own-account consulting engineering design services is estimated by noting that a) design and development engineers and architects performing consulting engineering services represent 62% of the design labour forcein countries such as the UK, and b) consulting services are only generated by investment in the agriculture and fishing, mining, manufacturing, and construction sectors Total investment Fig. 2 EU28 marketsector GFCF requiring consulting engineering services for construction (including R & M), plant, and IP investment. The total market investment in construction, plant and IP requiring consulting engineering services is shown in Fig. 2 for the EU28. Construction investment is the dominant contributor and both construction and plant investment decreased by about the same amount (10%) during the financial crisis in and have since recovered to pre-crisis levels. While amounting to roughly 60% of the plant GFCF, IP GFCF has risen almost continuously since 2008 at a rate similar to that for construction and plant investment (0.5% per annum). 3. Supply The supply of consulting engineering services is estimated from Supply-Use Table by calculating appropriate percentages of five products. This involves removing the following products classified according to Eurostat s NACE (Nomenclature generale des Activites economiques dans les Communautes europeennes) Revision 2: - M71 (Architectural and engineering activities; Technical testing and analysis) that involve technical testing and analysis; - M72 (R & D) that does not relate to engineering; - B09 (Mining support ) that does not relate to test drilling; - M74 (Industrial design in connection with specialised design) that are not the special design and advanced technical products dealt with by the consulting engineering industry ; - M80-82 (Security and investigation, service and landscape, office administrative and support activities) services that do not involve landscape-related activities. 4

5 The required percentages are obtained by scaling the total supply of a given product from SUT s using turnover data from Eurostat s Structural Business Statistics (SBS) database and other sources. As an example, the supply of M71 products at purchasers prices from a SUT is multiplied by the percentage of turnover for M71.1 (Architectural and engineering activities) in the SBS turnover data for the M71 (Architectural and engineering activities; Technical testing and analysis) industry sector. It is important to note that to avoid double counting, the supply of product used by the economic activity primarily responsible for the product is deducted from the total supply. For example, in the case of the M71 product, the M71 product in the Use Table that is used by the M71 activity itself is removed. The most difficult adjustment relates to R&D. Here the M72 product less the M72 product used by the M72 industry itself is reduced in proportion to: - the turnover of the M72.19 (Other research and experimental development on natural sciences and engineering) product; - the R & D expenditure by the business sector as a percentage of all sectors (from the OECD Gross Domestic Expenditures on R & D database); - the turnover for research in industries involving engineering (seven industry sectors in the OECD STAN R & D Expenditures in Industry database): - R & D for motor vehicles, trailers and semi-trailers dominates in many cases so a part of the expenditure that is for fundamental research and for commercialisation is removed using data for the number of calls for R & D proposals published by EAGAR It is noted a) that Frascati Manual used to classify R & D expenditures allocates all expenditure to an industrial activity s primary product category (this means that secondary R & D is excluded and R & D supply is underestimated by a few percent), and b) own-account R & D, unlike own-account design, is included in national accounts. Fig. 3 - The supply (in blue) of consulting engineering services calculated from Supply-Use Tables. The market demand from investment is benchmarked by best-fitting (see text) the demand (in red) to the supply. Summing the various components gives the supply of consulting engineering services (an example is shown in Fig. 3) 5

6 4. Benchmarking fees Given the demand from investment requiring consulting services and the actual supply of the services (both obtained from national accounts) the final step is to adjust the fees for construction and industrial investment so that the supply and demand curves correspond, as shown in Fig. 3. The supply, S, is given by S = F c G c + xf c *(G c + G i ) where F c is the fee for construction investment, x is the ratio of the fee for services industrial investment to the fee for services construction investment, and G is the investment (GFCF) requiring services for construction investment and for industrial (plant and IP) investment. This is a reciprocal yield density equation of the form y = 1/(ax +b) which can be fitted to the investment and supply data to give the optimum value of x. Making the reasonable assumptions that a) the fee for industrial investment is always greater than the fee for construction investment; b) both fees never exceed 15% of the investment; and c) the fee ratio x is less than 2, the fee ratio (see Fig. 4) varied between 1.1 and 1.5 for the EU28. Fig. 4 - The fee ratio x, namely the ratio of the fees for construction and industrial investment, for 2010 for the EU28 countries. Fig. 5 - Average fee for consulting engineering services in 2010 for construction and industrial investment. 6

7 Assuming that fee ratio over the period for which supply data are available (generally ) was constant, the investment and supply curves were best fitted in the least-squares sense to obtain the fee for construction-related investment and the average fee for consulting engineering services which is plotted in Fig 5. For the EU 28, the average fee varied considerably (from 3 to 14% with an average of 9.6%). This is in line with survey results from EFCA member associations and reflects the systemically low fees that prevail in some countries. 5. Market demand Knowing the fees for construction and industrial investment expressed as a percentage of the investment it is a simple matter to calculate the total market demand (which includes ownaccount design assuming it attracts the same fee as industrial investment) and the demand share (see Figs 6-8). Fig.6 - The market demand in the EU28 for consulting engineering services arising from investment in construction, plant, IP (mainly R&D) and ownaccount design. Fig. 7 - The shares in 2012 of the market demand for consulting engineering services in the EU28 countries arising from investment in construction, plant, IP and own-account design investment. 7

8 Fig.8 - The shares of the market demand for consulting engineering services in the EU28 countries arising from investment in construction, plant, IP and own-account design investment. In 2012 for the EU28, construction investment generated 64% of demand compared to 19% for plant investment, 13% of IP investment (mainly R & D) and 5% for own-account design. Some one-half of own-account design is for construction-related investment so construction related-investment accounted for close to two-thirds (66%) of demand. It is interesting to note that the share of construction-related demand has been decreasing continuously since the financial crisis, unlike IP-related demand that is increasing at about 1% p.a. 6. Non-market demand The non-market sector comprises so-called Public Service Units and non-market not-for profit institutions serving households (NPISH, e.g., religious activities). NPISH, although relatively unimportant, should be treated as non-market private entities but are usually transferred into the non-market public sector in national accounts. Investment by non-market NPISH leading to a demand for consulting engineering services is small and can be ignored. The demand for consulting engineering services arising from public non-market investment (i.e., non-market investment by general government) is estimated using the EIB approach summarised above for the investment in each of the economic activities that are dominated by infrastructure (health, education, transport, utilities, and housing). The approach is combined with Eurostat and OECD national accounts data classified according to Classification of the Functions of the Government (COFOG) to estimate the percentage of GFCF that is funded by general government One adjustment is needed in estimating the public non-market demand. It is necessary to add to the COFOG for each activity the GFCF corresponding to the construction GFCF that is attributed in national accounts to the activity. Not included in national accounts is investment by general government in the form of grants and other capital transfers. These are included using the COFOG data and the sum of the grants and capital transfers is split between construction, plant and IP GFCF using the national accounts market CFCF for the five infrastructure-dominated sectors. 8

9 7. Public sector own account design Also not recorded in national accounts is the own-account investment in design by the nonmarket public sector Following the EU SPINTAN project, the public non-market demand for consulting engineering services arises from intangible investments in design, R & D and mineral exploitation. consulting engineering services for all three are the same in the market and nonmarket sectors, notably design which for consulting engineering services involves AED deriving from construction and industrial investment.. This is not the case for other types of services related to investment since the service may derive from a value (e.g., the artistic and cultural value of a museum) unrelated to the construction and equipment cost. The demand for consulting engineering services arising from mineral exploitation in the market sector is already small: the non-market public sector own-account demand arising from mineral exploitation can therefore be ignored. It is noted that own-account R&D is included in COFOG investment data. For design, the very limited available data available from the EU SPINTAN project indicate that for in the USA, market own-account design amounted to 0.66% of GDP as opposed to non-market own-account design of only 0.18% of GDP, i.e., non-market ownaccount design is about 25% of market own-account design. This percentage is used for the EU28 countries together with the benchmarks from the market own-account design to estimate the amount of general government own-account design. 8. Total demand Fig. 9 Total (market and non-market) GFCF requiring consulting engineering services for construction (including R&M), plant, IP and ownaccount design. 9

10 Fig The total demand (market and non-market, public and private sectors) in the EU28 countries for consulting engineering services arising from investment in construction, plant, IP (mainly R&D), and ownaccount design. Fig The total demand in 2015 for consulting engineering services in each 28 EU country. The final outcome of adding in all the investment not included in national accounts is the total GFCF requiring consulting engineering services (Fig. 9) and the total demand for consulting engineering services (Fig. 10). This total demand arises from investment in the market and non-market sectors by both the private and public sectors. The total demand arising from construction, plant and IP investment in the 28 EU countries (Fig. 10) shows that demand dropped sharply in 2009 reaching a minimum in 2009 before growing more-or-less continuously except for a small decrease in The total demand for each EU28 country in 2015 is given in Fig Total demand shares Fig The shares in 2012 of the total demand for consulting engineering services in the EU28 countries arising from investment in construction, plant, IP, and own-account design investment.. 10

11 Fig The shares of the total demand for consulting engineering services in the EU29 countries arising from investment in construction, plant, IP, and own-account design investment. The shares of the total demand and their evolution over the survey period ( ) are similar to those for the market demand (see Figs 11 and 12). Fig The share of the total demand in 2012 generated by construction related investment. For the EU28, the share of the total demand in 2012 generated by construction-related investment (Fig. 13) varied between 40 and 75%, with an average of 62%.This variation is surprisingly large and there does not appear to be a simple correlation between the amount of construction-related work and the type of economy. 9. Public demand 9.1. Non-market public demand The share in 2014 of the total demand for consulting engineering services arising from investment by the non-market public sector (essentially only investment by government in the public sector) is plotted in Fig

12 Fig The share in 2014 of non-market public sector demand in the total demand for the EU28 countries. It is noted that the non-market (mainly public) demand remains significant in many countries and indeed is more than 5% of total demand in all EU 28 countries, with an average of 11.4% (see Fig. 14). At the country-by-country level, there were significant fluctuations in the non-market demand in many countries during the financial crisis in 2009 (presumably because government continued to invest while the private sector decreased investment). By 2014, most countries had regained a steady-state, although the level relative to the precrisis 2008 level had increased for some (e.g., Denmark) and decreased for others (e.g., Ireland). Fig The percentage of non-market demand (as a percentage of total demand) generated from public sector investment. Fig. 15 plotting the change in the non-market public demand over the period shows that 14 countries (red bars in the figure) experienced a decrease in the demand, and only 12 showed an increase (green bars in the figure). Not shown are Croatia and Cyprus owing to limited data. The increase was generally modest and only three small economies (Greece, Hungary and Romania) showed increases greater than 5% over the period. The data reflect a fairly drastic and generalised reduction in public investment Market public demand by public corporations GFCF and related measures are not available by institutional sector so one cannot estimate the demand arising from the public market sector (i.e., public corporations). The best that can be done is to use various estimates of public corporation GFCF to split the market demand between the private and public sectors. The public market demand is then added to the public non-market demand to obtain the public demand. 12

13 Fig The share of the demand for consulting engineering services arising from public investment that originates in market-sector public corporations. Public corporation GFCF and proxies such as fixed capital and capital formation are rarely reported and where they are reported they vary considerably between countries. However, it is often possible to infer public corporation GFCF from capital expenditure taken from company accounts. Seven countries have been examined to date. Fig. 16 plots the percentage of the public sector demand, as a function of the public sector demand, that arises from investment by public corporations. In countries where infrastructure-based services are dominated by large public corporations in areas such as transport and telecommunications, investment by public corporations generates over 50% of the demand for consulting services that arises from public investment. Caution is required in interpreting results, since there is likely to be dispersion reflecting statistical differences related to the institutional set-up for providing infrastructure and public services. For instance, an infrastructure facility or a public service may be financed and provided by a public corporation in one country (thus showing up as private investment in national accounts), while in another country it is financed by local government budgets (thus showing up as public investment). 10. Growth forecasts Fig The annual growth rate in the total demand for consulting engineering services for the period The total demand (market and non-market) in the EU28 grew by 1.83% each year during the period Country-by-country annual growth rates in the total demand for are plotted in Fig. 17. It is noted that several countries had no growth over the period. Only 13

14 Estonia, Latvia, Lithuania, Slovakia, Sweden, and the UK experienced growth rates above 5% per annum for the total demand. It is straightforward to apply 2015 parameters to official forecasts of GFCF and GDP to give the demand for CE services in There forecasts are encouraging. Of the 28 EU countries, all except Hungary, Greece and Slovenia and are forecast to have positive growth in 2016 (Fig. 18). Half of the countries with positive growth are forecast to have a growth rate in 2016 that is greater than the historic rate for Fig Forecast growth in the total demand for consulting engineering services in 2016 plotted as a function of the annual growth rate for Conclusions Benchmarking the demand generated by investment to the supply of consulting engineering services provides reliable forecasts of the public- and private-sector demand and demand shares across the non-market and market sectors. For the EU28 countries, the total demand will regain the pre-crisis 2009 level in 2016 and most countries will show positive growth in demand in 2016 which in one-half of the countries is above the historic annual growth rate for However, demand arising from construction investment by the non-market (essentially public) and market sectors is falling while the demand arising from investment in IP-related investment in the market sector is increasing strongly. Further information: peter@peterboswell.com 23 August