THE COST CUTTER

5 November 2010 Arupís Terry Hill has been tasked with bringing British infrastructure costs in line with our European neighbours. It will be a long process, he tells Paul Jarvis
“Sorry I’m late, I don’t really know this building,” admits Terry Hill as he eases into his chair at Arup’s head office. The comment probably says more about the construction consultancy’s impressive offices – all shiny glass jutting out into the street at unexpected angles, nestled in the shadow of London’s BT Tower – than it does about Hill’s timekeeping.

The head of Arup Group’s transport division is relaxed and happy to talk about his work, despite what must be a punishing schedule. Alongside his ‘day job’ at Arup, Hill is also chairing Infrastructure UK’s investigation into ways to reduce the cost of civil engineering for major infrastructure projects.

He is confident of finding a solution to the problem. “It’s very simple, really,” he says. “How we get there might be a bit more complicated. But it’s very simple – we want to deliver lasting reductions in the costs of construction for infrastructure.”

Hill is also excited about the potential his inquiry has to reduce overall costs and transform the way Britain looks at its infrastructure. A quick back-of-the-envelope calculation shows the scope the review might have. Hill suggests total infrastructure over a five-year period is about £400bn, of which around half is civil engineering.

“If you just do the sums, simply reducing construction costs by say 10% – which seems a relatively modest target – the figures seem to indicate…we can save £20bn.”

He points out that saving could be used to invest in “a couple of nuclear power stations”; or even the entire cost of the High Speed Two (HS2) project to deliver a new high-speed rail line running up the spine of the country. “So you can see the prize, that even with a modest  reduction there are some projects that otherwise might founder, [which] would be able to go ahead.”

It’s certainly an intriguing prospect, but as Hill admits, getting there will be a major challenge. The review was launched in June this year, in response to growing concerns over the disparities between the cost of infrastructure in the UK and overseas. Initial research had suggested Britain’s heavy infrastructure (such as roads or high-speed rail) was twice as expensive as that delivered in nearby continental countries.

Culture vultures
Much of that evidence came from a report into the potential for HS2, which indicated some big differences in approach between the UK and its neighbouring continental countries like France, Germany or Spain. One of the key findings was that there is a different culture in Britain’s construction industry compared to the other countries.

“I wouldn’t put it so much as culture,” Hill begins, cautiously. “I think there is an attitude that perhaps we put into how construction is delivered, that is maybe different from the near continent.” There are a lot of questions in this area that need to be considered, though.

“Are we too rigorous about things? Are we too hidebound? Is the industry too conservative; are clients too risk averse?”

These are all questions that he wants to put to those involved in the infrastructure sector, beginning with the private companies charging for the jobs. The danger here, of course, is  that private companies will be unwilling to co-operate in reducing costs – and therefore how
much they can charge for a project – at a time when budgets are being squeezed and work from central government has slowed from a flood to a trickle.

“I must admit I’m absolutely delighted,” says Hill. “Right from day one when this was announced, there has been a very positive feel from the industry and from clients about this exercise.”

Indeed, he argues it is in companies’ interests to cut costs, because it will mean more projects are able to be brought forward by government. “If there are going to be serious cuts – which there clearly are – then an exercise that reduces the actual costs of delivering infrastructure can only be to the good of keeping up the volume of activity that we have.”

But it won’t simply be the private sector which feels the focus of Hill’s team. “The other area is the client side: how are projects both specified and procured,” he says. He is specifically referrring to the problem of an unsophisticated client side, unsure of exactly what it wants or how to communicate its ideas to the private sector and worse still, making significant changes as the procurement gets underway. Hill is hopeful there is now a broad consensus within the public sector to tackle this issue.

“I’m delighted to say that infrastructure in general, and this cost exercise, have – I was going to say survived – but have spanned the change in government,” he insists. “There’s as much enthusiasm now with the responsible minister, Lord Sassoon, as there was under the previous government.”

Finally, there’s the third part of the review, “the whole regulatory, standards area, which we all work under”. For some, it might be easy to blame this third arena as the cause of all Britain’s problems and simply use the inquiry as an excuse to demand greater freedom from European
bureaucracy.

Not Hill. He recognises that this system is the same one that is applied in countries such as France and Germany – the very nations that are delivering infrastructure for half the price that we manage in the UK.

In it together
“We all operate under the same regime: EU procurement. Therefore it’s not a fundamental legislative or regulatory issue. It’s how we actually enact that, [which is] the thing we’ve got to look at.” It’s the culture – or attitude – question again.

So what’s the key to tackling this “attitude” in the UK? Hill suggests a new approach to the ultra-competitive nature of procurement might be a good starting point. “You would have thought – by the UK being so keen and rigorous about procurement and competition – competition should drive in efficiency and drive out unnecessary costs of waste.

“Whereas maybe sometimes we’re a bit over-competitive, and perhaps far more cooperation, alliancing and working together in long-term relationships actually might bring better benefits.”

He adds the review is already looking at what other countries do, and is finding a growing body of evidence in favour of “a far more collaborative way of looking at procurement”. Hill suggests this approach can cut the bidding period, thereby driving down costs. This in turn will give “greater certainty” to both bidders and clients, he argues, thus reducing the amount of contingency built into every bid and every tender.

The review was established because it was decided the old explanations – that the UK doesn’t have the skills base, or the country is too small to attract sufficient competition to keep costs down – were no longer good enough. With pressing needs in transport and energy, spiralling costs in a time of austerity became too important to ignore.

It is a role to which Hill is well-suited. Having been chairman of Arup for five years up to 2009, he knows about the importance of keeping costs down when delivering some of the world’s biggest projects.

And the firm is known for its success in negotiating the tricky political battlefield. It’s managed to pull off that difficult task of staying in favour no matter who is in power, capable of influencing ministers of every political hue. Hill’s position heading up the costs review is a good example of just that, as the coalition obviously felt safe in his hands despite him having worked closely with the previous administration.

Unique
Despite his calm, laid-back demeanour, Hill is genuinely excited and proud of Arup’s history and its place today as one of the world’s largest construction consultancies. “We have grown every year; never lost any money; never borrowed; never been acquired,” Hill continues with some satisfaction. “In that regard Arup’s unique. Of course we’ve got competitors but we are unique.”

Nonetheless, the economic downturn must surely be affecting that growth?

“Of course, we’re going through a recession at the moment, actually the UK and continental Europe is affecting us,” he acknowledges, before adding quickly: “Not as bad as the industry as a whole.”

Like a growing number of consultancies, Arup is looking overseas. “The majority of our  turnover is outside the UK,” he explains, “but the UK is our biggest single location to be working in.

One of the firm’s big advantages, he argues, is that the people who are chosen to handle a project are not those who may be geographically closest, but rather those with the most relevant skills. In a soundbite that could have come from the likes of Tony Blair or David Cameron, he explains: “We have the facility and advantage of not just being global, but also of being seamlessly global.

He attributes this approach to helping “smooth out” the peaks and troughs of the global financial position, ensuring that employees in Britain will still have plenty  of work without having to up sticks and live in Canada for the length of a project, for example.

Despite these assurances, Arup has only managed this continued growth through keeping its staff numbers under strict control. The downturn has clearly affected business, with  announcements earlier this year warning of up to 600 redundancies.

And things could get even more difficult. Hill admits it’s only crystal ballgazing, but warns the future remains unclear and is likely to get worse before it gets better. “I don’t think we in the UK and Europe – I hope I’m wrong here – are through the worst of it yet,” he says. And with the government continuing to bear down on costs, it might be easy to look despairingly at the UK over the coming months.

But Hill sees opportunity in adversity. “The government has got to do what it’s got to do – whatever its complexion, he says,” hinting that a fourth Labour term would have brought broadly similar results. “They are facing bigger forces than near-past politicians.”

Ministers and civil servants are all looking to the private sector to come up with some answers on how to square the circle of a lack of funding, combined with significant infrastructure investment needs. But Hill doesn’t necessarily believe the government should simply sit back and let private companies fill the vacuum.

For a start, he’s not convinced the capacity exists for such an approach. Private companies – particularly construction firms – have felt the full force of the financial meltdown at least as much as central government, so money will not necessarily flow freely from the private sector into the public coffers.

Instead, new ways of doing business and of financing projects need to be sought, Hill argues. “Can we match the different types of finance that there might be to the particular things of infrastructure? And can we reconfigure infrastructure so it appeals to different types of finance? Can [pension] funds be used for infrastructure? And what do we need to do to enable that to happen?”

There are plenty of questions to be answered, and Hill is well appraised of many of them. He is certain to continue searching for solutions for some time to come – which must surely be one slice of good news for the partnerships industry.

This page was last updated on:
24 November 2010.

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Indian summer

Itís been a long, dark winter for many in the UK PPP market, but as we head into autumn there are signs of progress at last

THE COST CUTTER

Arupís Terry Hill has been tasked with bringing British infrastructure costs in line with our European neighbours. It will be a long process, he tells Paul Jarvis

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