B&V\'s global vision
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Black & Veatch wants to double in size over the next five years, and it is looking to EPC contracting to reach that goal. CEO Dan McCarthy and MD for Europe Bruce Ainsworth explain the strategy.
The world is littered with engineering firms which are giants in their home market but enfeebled whenever they look for new business abroad. Without local knowledge and connections they find that nobody is quite so impressed by their expertise as the folks back home. The challenge for American engineers is perhaps even greater. The municipal procurement model in the US is very different from what is used elsewhere in the world.
It is no surprise then that only a handful of US engineering firms have evolved to become truly global. This month GWI met the CEO of one of them, Black & Veatch Water’s Dan McCarthy, together with his European managing director Bruce Ainsworth, at the company’s UK headquarters to discuss how B&V is rising to the challenge of being a global engineering firm in the water sector.
The first thing he makes clear is that B&V operates as a single global team rather than as a confederation of different local businesses. “In the water business we have five regions, three are in the US and one is here in Europe. The other is Asia. We share resources and facilities and the regions are linked in their business goals so they work together as a team rather than just as businesses with the same name on the hats.” The group as a whole is expected to have revenues of $550 million in 2005, with Europe representing the largest of the regions. The company aims to work in the “CEPC” space: that is to say the activities between conception, engineering, procurement, and construction. “We are particularly good at EPC project delivery and there is probably less competition in that sector than others,” says McCarthy. “There are lots of design engineers and planners out there, but being able to deliver a project on an EPC basis – there are far fewer people in that space.”
Although Black & Veatch does a lot of work as owner’s engineer, McCarthy stresses that the larger the suite of services the firm offers its customers, the larger the value that it can add to their business. “A major element of our strategic plan for growth involves our increasing our share of the EPC market.”
In the US this means pursuing design – build projects or design – build – operate projects in partnership with an operating company. Unlike CH2M Hill, B&V does not see a need to own an operations company in order to compete. “For a while we saw a preponderance of DBO. It seems as though clients had mixed success with that so it appears that there are more opportunities to have design build projects which may become contract operations awards. It really comes from the fact that the firms which are in the operations market tend to drive the market. When they are in the market, a lot of projects tend to come up.” At the moment no one is driving that market forward in America.
In the US, B&V sees most of its new build work in the southwest. “As far as looking for greenfield, that seems to be where they are concentrated. In the rest of the country it is primarily a matter of rehabilitation or in some cases even downsizing.” B&V’s three regional US divisions ensure that the right expertise is where it is needed. “People who have experience of building new plants do not necessary have the best expertise for making the most of existing infrastructure,” he observes.
Outside the US B&V has built on the international network which it acquired when it merged with UK-based Binnie & Partners and Paterson Candy in the 1990s. Getting into the EPC contractor role has required some ingenuity. In some BOT projects, it is necessary for EPC contractors to take a developer role – committing their own capital to the project – in order to secure a deal. “If market conditions are such that this is the game that is being played then we have to look at whether we want to be in that position or not.”
Black & Veatch itself has acted as developer for two Middle East projects: the Ajman wastewater concession in the UAE, and the Kahrama IWPP in Algeria. “Most of our strategy in the development business was never to be a long-term owner,” McCarthy explains. “We were not in the business for the full 20-year contract. Our intent was to move our investments into new opportunities because we only had a limited amount of capital that we wanted to have stranded in that part of our portfolio.”
The Ajman concession has reportedly suffered from lower than expected connection rates, and B&V’s partner, Thames Water is said to be negotiating an exit from the project. McCarthy indicated that B&V was not planning to sell its interest in the project just yet. At Kahrama B&V has taken an owner’s engineer role rather than an EPC contractor’s role, and it retains an equity interest in the project, although it has made repeated attempts to bring in another private developer to finance the project.
Despite these difficulties McCarthy is not ready to abandon the equity investment strategy just yet. “We look at things from time to time. We have to say that we are looking at a few roles but we have probably used up our portfolio allocation for that position. This may be so until we have turned around one of these projects.”
Black & Veatch is an employee-owned company (having converted from being a partnership in 1999). As a result it has to be more parsimonious with its balance sheet than publicly quoted companies (such as Earth Tech, the US engineer which has been involved in a number of water BOTs). “There is the ownership role which has to be independent of whatever role we might play in a project delivery. It has got to stand up on its own,” McCarthy comments.
Fortunately B&V is now finding enough opportunities for EPC work without the need to commit its balance sheet. “There are a lot more investors in the Middle East now than there were a few years ago,” comments Ainsworth, who is responsible for the Middle East as well as Europe. He doesn’t elaborate on which projects B&V are currently pursuing in the region, although he agrees that the company is looking at taking advantage of its expertise in the power sector to get involved in IWPPs.
Ainsworth is much more forthcoming about B&V’s recent successes in the UK market, where it has won a string of contracts relating to the 2005-09 price review period. “We have certainly focused our efforts on the UK water utilities and what we call the environment, for example activities such as flood defence.” B&V’s success in this market is due to its experience across the whole range of activities, Ainsworth contends. “I think it is the fact that we are one of the few engineers with experience of EPC. Even though we may only be doing design work, we know how to design a constructable project.”
Ainsworth was appointed to run the European region in May 2005 with a brief to improve the performance of the business, but it has not been a matter of importing business practices from the Kansas City head office. “We want to take the most effective parts of the operations here and help take these concepts and ideas and spread them through the rest of the global water business. There has been a lot of trends that start off in the UK, and end up in the rest of the world and we have a lot of good experience of that with the staff in the UK, which we have been exporting to other parts of the world.”
Elsewhere in Europe, B&V has some involvement in Belgium, the Netherlands, Sweden as well as the EU accession nations and the former Soviet Union. “We have to have some engagement in these markets in order to have a sense of what the market is doing, so typically we will follow the funding agencies because that is an opportunity to work without being in a local business in these countries and keep track of what is going on,” Ainsworth says.
It is a similar pattern for B&V in Asia. The company has 700 staff in China, spread between its offices in Shanghai, Beijing and Hong Kong. It inherited its Hong Kong office from Binnie & Partners. This has given it a strong base for projects in the city and the surrounding Pearl River delta.
On the mainland, McCarthy sees a different pattern to the firm’s work. “Most of our projects are construction management or institutional strengthening from the perspective that we are trying to help the Chinese authorities set up working utilities that can operate under traditional business models rather than government subsidies or government revenues.
Elsewhere in Asia the high point of 2005 was the commissioning of the SingSpring desalination plant at Tuas. B&V worked closely with Hyflux to deliver the plant, although Hyflux generally gets most of the credit. “Our scope of work was fairly extensive,” McCarthy comments. “We see that this is a big deal for us and we hope to have many more like it. Our Singapore office is probably our centre of excellence for desalination and membrane treatment. The largest membrane treatment plants in the world are there and we have been involved in those projects.”
What about India? Will it be the next market to take off for B&V? McCarthy has an interesting view of the opportunities which India offers. B&V has 150 staff in the country in Delhi, Mumbai and Pune. “We see it as a good opportunity to have access to some much needed resources which are in demand around the globe,” he says. “There are not sufficient new graduates entering the workforce in the markets that we operate so we are not going to wait until it is a crisis situation. We are going to develop that over time. We have some very good resources there.
“We are trying to do some work for China in China and some work for India in India, but also to provide work for our Indian and Chinese employees elsewhere.”
McCarthy believes that in the future B&V will work on projects in global teams which are not co-located. They will be able to work continuously across time zones, so the client can expect a project completed and on their desk in the morning. Already he is beginning to feel the strain of this mode of operation. “My week begins on Sunday afternoon,” he points out, adding that he does not sleep well on planes.
And where will all this get B&V. “In five years we are going to be twice as big as we are today,” he declares. The main focus of growth with be in B&V’s five domestic markets, the US, UK, Hong Kong, Singapore and Australia. Although growing the EPC business is a priority, McCarthy emphasises the consulting role. “We will want to balance our portfolio so that we have both EPC and traditional engineering together because one has higher revenues and higher risks and the other has lower revenues but lower risks and we have to make sure that we are not overexposing ourselves to one or the other. That goes for geographic markets as well as service offerings.”
It raises the question of whether B&V’s ambitions are being held back by the relative weakness of its balance sheet. McCarthy is confident that the increasing balance sheet risks that EPC contractors are being expected to take will not be a problem. B&V’s lenders are confident of the firm’s earnings profile and record for delivering successful projects. He adds that the scale of the financial guarantees that the company has to make in its nuclear power business are far greater, and the water division can comfortably take on larger EPC contracts without attracting the attention of the firm’s risk managers.
Nor does McCarthy believe that competition from new entrants to the market will hold back B&V. He does not believe that equipment suppliers such as GE and Siemens have a long-term interest in acting as EPC contractors. “Degrémont and Veolia Water Systems seem to be the only ones staying in the whole area,” he observes.
“It is the medium size firms that are more threatened. I suppose that we have to some how make sure that we do not slip into being a medium size firm.”
With so few engineering firms competing globally for EPC work, this should not be a problem.