Value Engineering Can Cut Costs
- Dec. 10 2014 00:00
David Whitehouse is AECOM Chief Executive Continental Europe and has worked in Russia for more than two decades. Raymond Fadel is AECOM Country Manager for Russia and has worked with leading developers and architects for 25 years.
Where is the activity coming from at the moment?
We are seeing more investment from Asia, countries like China and South Korea. Looking at Russia's regions, a lot more manufacturing is going out into the regional cities and Moscow region. It is not so much about moving out of Moscow but rather the investor-friendly regional governments that are building transport infrastructure that is especially helpful to the industrial sector.
About 15 years ago most of our work was in two cities. Now, by number, 80 per cent is regional, though by value 50 per cent is still in Moscow and St. Petersburg.
Some would-be investors have complained at conferences about the cost of finance within Russia, saying that borrowing costs must come down if the economy is to develop. Do you agree?
The cost of finance has always been high in Russia, though it is higher at the moment. The key difference is the exchange rate and the ability to refinance internationally and that is the issue caused mainly by sanctions. Once that clears and the ruble stabilizes then development will continue irrespective of the high finance rates.
In recent years retailers have invested a lot of effort in broadening their presence in Russia but this trend slowed significantly in 2014.
Companies have moved their emphasis on multiple retail programs from Russia to southern Europe, the Balkans — Montenegro, Croatia, Serbia. These countries are taking up some of the slack. There is an across-the-board slowdown in Europe and a change of focus on where those programs are going.
Given the ruble situation and people hanging on to their money, consumer spending is bound to be slower for months, if not for a year or more. As it takes two years to get these retail stores up, there is not the confidence there, so it is going to be three or five years.
But Russia remains a strong market for investors in commercial real estate (CRE) across many sectors and I don't see that waning. It will spike up and down and it will be back with a vengeance.
Is AECOM seeing a change in the type of projects, perhaps more government work, as a result of the state of the economy?
There is a cautious and hesitant level of investment from foreign manufacturers across a broad spectrum: foodstuffs, household or automotive.
On bigger infrastructure projects there is a shift to the public sector, especially those that are directed to the east rather than west. In the oil and gas, and power sectors AECOM adds a significant new capability in this region with its acquisition of URS.
If you look at the surrounding region we are seeing good growth in Georgia, in the Kazakh market some major projects are picking up, and Azerbaijan has slowed but it is steady.
What are the main challenges in the Russian market?
You see the ruble going up and down and the interest rate changing periodically. This affects everyone. In CRE and the residential sector, the price cannot keep up with inflation because buyers are not ready to accept a 20 or 30 per cent increase in price. This puts some projects on hold or means developers have to change their business plan.
In industry something similar applies because demand, for cars, for example, has fallen. Customers cannot get credit so easily and the cost has gone from 12 per cent a year ago to 18 or 19 per cent now.
In beverage, some clients producing, say, juice import all their raw materials from Europe. Although the cost in euros has risen by 20 or 30 per cent they cannot adjust their price in the market because there are big players who can keep their price level and that would simply eliminate all the small companies.
In food, we have one project at a chicken farm where the price of meat and poultry is going up, the investment is still the same, but most of the equipment comes from Europe and the U.S. and that is costing more in foreign exchange terms.
How can AECOM help in such a situation?
Take the chicken farm. They want to proceed because there is market demand for their product but they want to review the business plan. We are helping them take costs out. We can do value engineering on their equipment to perhaps get the same quality of equipment but at a lower price, or just look for different suppliers or construction materials to get a lower or similar price.
Which sectors are better withstanding the economic currents? There are a number of big projects in the energy sector.
One advantage of AECOM is that it has different business lines so we can act in different sectors. None of these business lines is constant. There is scope for infrastructure to expand. We are expanding our relationship with the regions, with affiliated offices where we have projects.
We are focusing on the 2018 FIFA World Cup where AECOM has a strong team in sports. We are handing over one of our key sports stadiums, Spartak Otkritye arena, in the north-west of Moscow, which is one of 12 venues for the World Cup.
We are working on the legacy plan for several of those venues so that they can be developed after the games, as a location for commerce, tenants, entertainment and parks. We are involved with Volgograd, Samara and Nizhny Novgorod and are now in close discussions with Kaliningrad to see how we could develop our relationship.
A month ago we signed a project at Sheremetyevo airport where they want to extend the terminals and link them all by tunnels, and all this has to be finished before the World Cup.
In St. Petersburg we are working with Gazprom on the Lakhta Tower and we are proceeding with another development for them.