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The value of construction in the New Zealand economy

The value of construction in the New Zealand economy

In 2011, the Construction Strategy Group (CSG) commissioned a step change report by editors PricewaterhouseCoopers (PWC) that for the first time authoritatively summarised the sheer size and impact the construction industry has on the health of the New Zealand economy.

Among other things, it highlighted that for every dollar spent on construction it returned a direct benefit of $3 dollars to the overall economy.

It also highlighted several drivers that needed urgent attention, such as boom-bust impacts, poor procurement practices, low productivity, skill shortages, and regulation being implemented without thorough cost-benefit analysis.

Five years on from that ground-breaking report, the CSG has wisely commissioned an update of the initial PWC report to see what progress had been made, identify any new issues and to provide some possible solutions.

The construction industry clearly affects so many lives, not only financially through employment and investment but also providing the built environment and shelter that we all need to live and work in safely.

Following is an excerpt from the 2016 report that makes compelling reading, and highlights that without change on many fronts, our industry will struggle to meet the demands and needs of the nation’s building expectations.

 

The 2016 PWC report provides an update to our 2011 report titled Valuing the role of construction in the New Zealand economy.

It was commissioned by the Construction Strategy Group (CSG), in association with the Construction Industry Council (CIC) and BRANZ, in order to demonstrate to the Government and other stakeholders the value and significance of the sector, and ensure the profile of the construction industry is up to date.

The previous report highlighted the value of the construction sector, and the key role it plays in the New Zealand economy.

However, it identified that the boom-bust nature of the sector was clearly a problem, and was a barrier to improving its productivity and overall performance. It stated that the Government’s key focus needed to be in developing forward certainty for the sector, allowing it to maintain and develop skills, and boost labour productivity.

We set out a number of options which the Government could consider which could enable a more consistent and predictable environment for the sector.

This report looks at the state of the construction sector five years on. The previous report was written at the bottom of the cycle, whereas today the sector is operating in a boom.

However, while the state of the industry has changed significantly, the underlying structural issues which were identified in our previous report largely remain today, and the impact of the business cycle on the sector is just as strong.

The construction sector plays a large role in New Zealand’s economy, contributing strongly to employment, businesses and GDP. It is New Zealand’s fifth-largest sector by employment, comprising around 178,100 Full Time Equivalent (FTE) employees, with another 53,600 FTEs in construction-related services.

Together, this accounts for 10% of total employment across the economy. Construction and construction-related services contributed 8% of New Zealand’s total GDP in 2015, and has an even greater impact when integration with other parts of the economy is considered.

“The construction sector delivers almost as much of New Zealand’s GDP as the whole of the Waikato region, and this contribution is growing. Over the past three years, core construction has seen 17% GDP growth, overtaking wholesale trade to become the eighth biggest contributing sector to GDP.

One out of the top 10 individual sectors by contribution to New Zealand’s GDP, construction supported the highest job growth between 2012 and 2015, with core construction contributing one out of every five new jobs in New Zealand (26,000 new jobs).

In contrast, the agriculture, forestry and fishing sector, for example, contributed a much smaller 330 new jobs over the same period. Adding in construction-related services means the sector is even more significant.

There is a large return to New Zealand’s economy from support for a sector that continues to struggle with the cyclical nature of work and low productivity. Since 2012, measured labour productivity has increased by only 1%.

Every 1% increase in labour productivity for construction yields an increase in GDP of around $139 million, even before multiplier effects are considered.

Supporting the sector by smoothing sources of volatility means that gains in underlying productivity are not lost when the sector encounters a bust. Over the long term, gains in productivity and multiplier effects would compound to produce even larger benefits.

More broadly, improving performance of the sector provides a range of benefits which will be shared by the industry and consumers.

For the industry, this means improved profit margins, better skills development and earning opportunities, and a better ability to weather the cyclical nature of the industry.

For consumers, this means high quality construction will cost less, involve fewer project delays, and have a wider variety of options to satisfy consumer demand.

Without change, the sector will struggle to meet medium-term demand. There is a significant task ahead to accommodate new private sector and government demand, compounded by the housing shortage in Auckland.

The recently released decisions version of the Proposed Auckland Unitary Plan provides for an additional 422,000 dwellings over the next 30 years. The opportunity for the construction sector is significant, but the sector will not be able to meet the challenge without change.

This report identifies a number of areas in which government, industry and consumers could make changes that would help improve the productivity and performance of the industry.

A recurring theme from our interviews with industry participants was that the Government should take advantage of the current conditions and work more closely to smooth volatility in the cycle.

The Government could plan its investment programme to support the industry in a downturn. In this regard, the same value of funds would be spent but the timing would be used as a tool to smooth volatility when private sector demand drops.

There is the potential to avoid a bust if government-sector demand can counteract falling private-sector demand.

In addition, a common theme from industry participants was that there was a clear need for government procurement processes to improve.

Greater uptake of standard contracts and the potential for the MBIE’s procurement guidelines to become mandatory during government procurement, unless there were strong reasons not to use these, were touted as areas which would provide an immediate impact for the sector while having minimal impact on the Government.

More broadly, initiatives the Government could take include:

• encouraging labour supply through immigration and funding training programmes,

• increasing the use of standardised contracts,

• integrating design and build functions during procurement,

• procuring at scale to ensure economies of scale are achieved,

• promoting counter-cyclical investment to smooth construction activity,

• considering improvements to regulatory regimes that negatively impact on construction sector performance,

• assessment of the costs and benefits of new regulations should be undertaken by the Government before they are introduced, and existing legislation relating to liabilities and retentions should be reviewed through this lens,

• consideration should be given to options for streamlining consenting processes and rationalising the number of Building Consent Authorities to improve consistency in consenting and compliance processes,

• recognising that the industry responds rationally to the operational framework constructed by the Government, changing that framework creates incentives for the industry to invest, innovate and improve the sector. However, there are initiatives that the industry itself could undertake to assist with improving its own performance. The industry could help grow its productivity through investment in skills, training, innovation, promoting better contracting practices, and exploring options for improved quality assurance processes, and

• the industry is facing a labour shortage across the skills spectrum, with a particular shortage in higher-value roles. The industry could look to recruit workers from other sectors with transferable skills (eg project managers). Design-related roles are currently a key bottleneck, so encouraging graduates in this, and other high-value areas would support the industry over the longer term.

Finally, consumers can also play a role in improving the performance of the construction industry:

• Clients and consumers could contribute to better performance of the industry through encouraging improved project management practices, considering whole-of-life-costs for construction projects, and having greater acceptance of standardisation of products and components as well as mass-customisation in construction.

• We know that there is no silver bullet to deal with industry volatility. New Zealand has not been alone in grappling with the troughs and peaks that often accompany construction activities.

But the lesson of past cycles is that we have to find a better way of coping with them. The way to do that is through close partnership with the Government.

Both industry and the public sector must be committed to smoothing the highs and the lows.

• It is our view that the spirit which gave rise to the establishment of the Productivity Partnership between the Government and industry following publication of the 2011 PWC Report should be rekindled.

The 2016 PwC Report offers some guidance as to what might be achieved — an emphasis on skills acquisition rather than academic qualifications may offer a better pathway for recruits into our industry through the tertiary education system; the Government might make it a requirement for agencies of state and local government to follow the guidelines for the state sector which aim at best value procurement rather than lowest cost; And accumulation of housing land by the Government to give a benefit of scale to development over time can help the progress of lower-cost housing through customisation using off-site manufacture.

• The importance of the industry, including as an employer and generator of economic growth is, as disclosed in the PWC Report, now such that attention to preserving its commercial health should, in our view, be a priority across the public sector.

As representatives of industry participants, our respective organisations are committed to adding value to the contribution the sector makes to New Zealand’s economic performance.

 

The above excerpt from the full report provides only a taste of the insightful recommendations that are provided for the Government, the industry and the consumer alike.

I would urge you to read the full list of recommendations contained within the report that can be downloaded at http://www.pwc.co.nz/services/management-consulting/publications/valuing-the-role-of-construction-in-the-nz-economy.

This PWC 2106 report is, once again, a step change document for our industry, and it provides a much needed blueprint for a collective approach to maintaining a strong, professional and productive industry which will produce the homes and buildings New Zealand needs.

However, this will only happen if those in power and positions of influence heed the recommendations and take action.

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