Protect businesses, jobs and skills by investing in the vertical construction industry

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Naylor Love chief executive Rick Herd

The chief executive of one of New Zealand’s leading commercial construction companies is asking the Government to consider underwriting the vertical construction industry as an addition to its Covid-19 economic stimulus package.

Without support, warns Naylor Love’s Rick Herd, the Covid-19 alert level 4 lockdown will see substantial job losses and loss of capability in New Zealand’s vertical construction sector ­— the industry that builds schools, hospitals, civic and commercial buildings.

“A huge opportunity exists for the Government to even further protect the economy against the impact of the Covid-19 virus,” Herd says, “by investing in New Zealand’s $9 billion vertical construction industry.

“At the same time, it will save jobs, preserve essential skills, and ensure key infrastructure is built and ready to use when the economy starts to recover.”

Herd says he applauds the Government’s recent $12 billion infrastructure package announcement to help stimulate the New Zealand construction sector.

However, there is insufficient in that package for the vertical construction sector.

“Some $10 billion of the Government’s investment package will be in ‘horizontal’ infrastructure (mainly roading projects), with only a small amount in vertical construction work for the likes of hospitals and schools.

“While very much needed, most of the road construction money will go to a handful of firms. We believe there is an equally important opportunity to stimulate the economy and save jobs by supporting the commercial construction industry, where there is a far greater number of businesses and projects, and far more people employed.”

Building contractors, including subcontractors, work on low margins and high cashflow, Herd says, and therefore disruptions to cashflow can be disastrous.

“We will almost certainly see many small-to-medium vertical builders and many subcontracting organisations failing over the next few weeks, unless the Government can focus on this subsector and provide incentives to keep the current pipeline of work pumping.

“Having projects guaranteed would also give confidence to small and medium-sized subcontractors to hang in there and stay in business, keeping their skilled staff employed”

Herd says the great thing about commercial construction is that it is labour-intensive.

“On a vertical building site you have carpenters, electricians, plasterers, plumbers, steel workers, glaziers and so on — a multitude of work for the many small and medium businesses and subcontractors in our industry.

“If the Government is prepared to underwrite the finances for that work, our industry can continue to build important structures such as the upgrade of the Queenstown and Auckland Airports; universities can continue with their new building plans; and important new tourist amenities — which will be needed in the future — can get built now so they are ready for the recovery.

“It would give confidence to private organisations to continue with the billions of dollars’ worth of projects that might otherwise be put on hold until the economy becomes more certain, which could be years away.

“We are also hearing of some businesses in the airports, tourism and hospitality sector who, if there is support, are keen to get underway with major refurbishment and expansion projects while things are quieter, as it’s easier to get things done when there are fewer patrons to work around.

“This would be a great way of ensuring construction jobs and skills sets are preserved, and in a position to support the recovering economy once Covid-19 is fully controlled.

“We know from previous experience of New Zealand’s boom-and-bust construction industry that, once lost, these skills and businesses can take years to get back which, in turn, has a dampening effect on our ability to build crucial infrastructure, and on the economy.”

• Download a video interview of Rick Herd talking to this issue here: https://www.dropbox.com/sh/8scc9h04htveeiz/AADd5kxQgeTRboPL_HQtmTwua?dl=0

• The commercial, or vertical, construction sector builds large buildings, including commercial buildings, high-rise apartments, hotels, schools, hospitals, retail malls and office blocks.

• In terms of scale, the construction industry is made up of three subsections: residential housing, the largest at $26 billion per annum; vertical commercial at $9 billion per annum; followed by horizontal/infrastructure (roads, rail, bridges, tunnels etc) at $8 billion per annum.

Currently, nearly all of the Government’s Covid-19 finance package has gone into the horizontal/infrastructure sector.

• Unlike the horizontal construction sector, which is dominated by about five major firms, the vertical construction sector comprises hundreds of small-to-medium enterprises working alongside some of the bigger players such as Naylor Love.

These SMEs represent a huge skill and employment resource, but are at high risk of failing under the current economic downturn because of Covid-19.

• Naylor Love is a 110-year-old business founded in Dunedin. It is one of New Zealand’s largest construction companies.