黑洞社区

This time last year, the European market was starting to teeter. Greece and Ireland had already been bailed out, Spain and Portugal鈥檚 economies looked increasingly unstable and the full impact of the public sector spending cuts was being nervously anticipated. No one doubted there would be a tough road ahead. But a tough road so severe it would lead to the potential collapse of the eurozone within just 12 months? The situation has escalated faster and more dramatically than most people feared.

The severity of the eurozone crisis was compounded last week with the downgrading of the credit ratings of nine European countries including Italy, Spain, Austria and France - which was stripped of its Triple A credit rating by Standard & Poor. The move threw European, and global, markets into fresh panic over the stability of the eurozone. Foreign secretary William Hague warned of a potential meltdown and said the downgrading proved that Europe was, by no means, 鈥渢hrough its problems.鈥�

For European contractors more specifically, this year鈥檚 Top European contractors league indicates the winners and losers (pages 40-45). But it is worth remembering that this is all against the backdrop of an unprecedented eurozone crisis and a rapidly changing market that makes it nigh on impossible to predict what might happen next. As Andrew McNaughton, chief operating officer at Balfour Beatty says: 鈥淚 guess the main question is how we will even define mainland Europe by the end of 2012?鈥�

As the situation escalates, every possible scenario is on the cards, including the collapse of the euro which would have catastrophic effects on firms worldwide.
Last week 黑洞社区 revealed that companies were scrambling to rewrite contracts to ensure there was an allowance within them to switch currencies in the event of the loss of the euro. Richard Threlfall, UK head of infrastructure at KPMG, said at the time: 鈥淭here is an issue that should be on the radar of all construction companies as they analyse the threat to the euro, and that is the potential impact on their supply chain. Without a clause allowing a conversion into another currency if necessary, if the existing currency ceases to exist, the contract will become frustrated and hence null and void.鈥�

Here we look at the state of play among Europe鈥檚 biggest contractors in a volatile market before investigating the likelihood of the fall of the euro and the impact it could have on the industry.

Survival in a tough climate

There has been little movement among the top 20 firms in the league from last year with French giants Vinci and Bouygues holding firm in the top two spots and German contractor Hochtief at number three posting an impressive 50% rise in profit.

While there has been minimal change in the specific positioning of the top firms, they have collectively developed over the last 12 months more or less in line with geographical market conditions. The biggest loser in the top 20 is Spanish firm Acciona which posted an 86% decrease in profit while German firms have performed particularly well with Bilfinger Berger reporting a 103% increase in profit.

Any firm affected by the possibility of the euro failing should have developed a contingency already

Rick Willmott, Willmott Dixon

Moving down through the rest of the tables, the biggest drops in profit affect Portuguese and Italian firms. Portuguese firm Mota Engil, ranked 43rd, saw a 49% drop and Zagope, also Portuguese and ranked 103rd posted a fall of 79%. Italian firms Coopsette, Trevi and Unieco, saw 70%, 43% and 37% profit drops respectively.
German, Swedish and Dutch firms performed well along with Balfour Beatty which saw profit up 48% despite tough market conditions and public sector cuts in the UK. This is most likely due to the fact that the firm has an international reach and doesn鈥檛 focus too much on work in Europe.

Indeed, most of the top performing firms are most likely to weather the European economic storm not just because they are big enough to have financial stability, but because their size means they are already exploiting other, less volatile markets.

John Stanion, chief executive at Vinci Construction says: 鈥淓urope is our historical base but the outlook for growth in construction in the current economic environment is uncertain. While growth is depressed in Europe, recovery will come and the rest of the world is still on a relatively sound growth track.鈥�

And Balfour Beatty鈥檚 McNaughton adds: 鈥淲ith economic uncertainty prevailing in Europe it is even more important for contractors to ensure that they are well positioned to take advantage of the opportunities in other emerging markets.鈥�

The future of the euro

But what would happen if the situation got so bad that the euro was no longer even in existence?

As 黑洞社区 revealed last week, most existing contracts are silent on this point, according to lawyers Dominic Helps from Corbett & Co and Fiona Rossetter of Dundas & Wilson. So unless firms work together, and fast, to add a clause in to cover the chance of a currency collapse, then they are risking costly renegotiations affected by exchange rates that would take time and be difficult to agree on - putting pressure on margins.

Most international contracts state that issues of currency are to be sorted out by the parties involved. So it is down to individual firms to 鈥済et together, sort it out and put something in the document鈥�, according to Helps. But how many companies are even aware that this could be a problem? And what exactly does contingency planning involve?

How real is the risk?

The fall of a currency would have such a colossal impact that there are question marks over the likelihood of things getting to that stage. But the situation in Europe has now reached such dire straits, with debts topping 鈧�10 trillion, that the loss of the euro is a real possibility. As the debt crisis has engulfed Greece, Ireland and now Portugal, contingency planning has become vital.

鈥淭hings in the eurozone have got sufficiently serious now for firms to be putting together some sort of contingency plan in case the euro does fall,鈥� says Helps. Charles McBeath, managing director of structural engineer Ramboll UK, puts it more bluntly, saying that anyone not preparing this possibility is 鈥渁bsolutely crazy鈥�.

For those that don鈥檛 protect themselves, there will be no safety net to fall back on: 鈥淚t looks as though most existing contracts are silent on this issue of currency switching,鈥� says Fiona Rossetter, senior associate in the construction department at law firm Dundas & Wilson. 鈥淪o the most likely outcome if a currency ceased to exist would be renegotiation. Assuming this was part of a number of contracts then people in the middle would still be obligated to deliver what they have agreed legally with those further up the supply chain. So when you鈥檙e revaluating costs and currencies - which would all depend on exchange rates - things could get very complicated.鈥�

KMPG鈥檚 Threlfall adds: 鈥淭his doesn鈥檛 just apply to building contracts, of course - but to any based on euros. The outcome could be catastrophic.鈥�

The contingency

The onus to protect against a currency collapse lies with the individual companies and there is no evidence to suggest that the government would get involved or amend legislation. A spokesperson for the Department for Business, Innovation and Skills said it would be 鈥渦p to the individual firms鈥� to put an agreement in place.

But how many firms are actually doing this? Threlfall says he is aware of several Spanish companies putting clauses into contracts allowing for a transfer to another currency - most likely dollars - but that it wasn鈥檛 yet widespread practice. Ramboll鈥檚 McBeath says that most of the contractors he works with have been looking into changing their contracts too, though he would not be drawn on names. He adds that he would be 鈥渁mazed鈥� if it wasn鈥檛 at the top of the list of priorities for every firm dealing with European contracts or suppliers.

The response to this issue among the top European contractors is mixed. ISG confirmed it was reworking its European contracts to prepare for the potential collapse of the euro. Willmott Dixon chief executive Rick Willmott says: 鈥淎ny firm affected by the possibility of the euro failing should have developed a contingency already. It should be top of their agenda.鈥�

But a spokesperson for Balfour Beatty - the largest UK-based European contractor - says: 鈥淎dding a clause into contracts to deal with the potential loss of a currency is quite a usual thing in the Middle East. But not in relation to the euro.鈥�

Whether or not the worst happens, planning for it is always preferable to being taken by surprise. And legal and financial experts alike urge construction companies to ensure they have a strategy in place. As Helps says: 鈥淏etter to put the work in now and pull together a plan between yourselves on projects than wait for the courts to potentially have to sort out the mess.鈥�