Impact of Economic and Financial Crisis in the Construction Industry in the UK - Research Paper Example

Impact of Economic and Financial Crisis in the Construction Industry in the UK Candi number: Impact of Economic andFinancial Crisis in the Construction Industry in the UK Introduction Financial and economic crises are known to impact greatly national economies. In some cases, such crises go beyond national borders and impact the global economy grossly. There have been several studies conducted with respect to the effects of financial crisis in national and international economies. However, very little has been done in the study of the impacts of financial and economic crisis to specific industries or sectors of the economy especially in the United Kingdom. More specifically, there is very little data available concerning the impacts of such crises on the construction industry. Without such information, the nation’s construction industry may not be well prepared to face financial and economic crises if they ever occur in the future. Given the magnitude of the construction industry in the UK, it needs a lot of time and resources to conduct a nationwide study of the impacts of financial crisis effectively. It is for this reason that this research will be rely on data related to Balfour Beatty to aid in the determination of the effects that economic crisis have on the industry. The Balfour Beatty is one of the construction companies in UK and how it coped with the financial and economic crisis will provide us with the measure of the intensity of the crisis in the UK construction industry. From its background, the company has been faced with issues that have threatened the existence of the company. These issues include low staff in the First World War and the crisis that hit the company in 1997. Main Objective 1. To establish the impact of economic and financial crisis in the United Kingdom’s construction industry Specific objectives 1. To establish the impact of the past economic and financial crises in the UK economy 2. To establish the level of activity of Balfour Beatty during financial and economic crisis 3. To establish a correlation between financial and economic crisis and the growth of the UK construction industry Limitations of the Study This study will be limited to Balfour Beatty as a construction company and will therefore preclude other of the company’s activities that are not related to construction work. The study will also be focused on the effects of the 2007-2010 financial crisis with little mention of the effects of other financial crises if any. Balfour Beatty: Company Background The idea to start the company was conceived by Andrew Beatty and George Balfour in the year 1882. The start of this business was inspired by the Electric Lighting Act of 1882. In 1909, the company was founded by Beatty and Balfour. The company dealt with contractors, railway and lighting properties, general and electrical engineers, operating managers for tramways and the promotion of new enterprises. The first contract the company did was construction of a tramway system and it involved the laying of a new track and lighting cable and the installation of more producing plants at the power house in Dunfermline in Fife. The First World War affected the running of the company because most of the staff in their Edinburgh and London offices had left for the army. Due to low staff the tramway contract was stopped and the company shifted to other projects that were of national importance. The rise in unemployment in Europe in 1920 forced Balfour and Beatty to open another company called Power Securities Corporation Ltd. The company was opened on the need to increase the finance resources and fund more and large projects such as the hydroelectric projects in Scotland. In 1924, Balfour Beatty went overseas and did hydroelectric projects in East Africa and Palestine. Its work overseas has been a success. In 1969, the company merged with BICC, a British cable making giant. The merger strengthened what the company was doing and activities such as railway electrification, motorway construction and property and building development were added. Balfour has been involved in major construction work in the European region. Their work includes urban traffic management schemes and the expansion of the UK road network. In 1997, the company was hit hard and recorded major losses in the cable business due to the drastic changes in the world cable market. A strategy was developed to dispose of the cables. In 2000, the merger between the company and BICC died out and once again the company emerged as an independent public company. The company acquired Adtranz’s traction power supply and rail electrification to become the leading maintainer and supplier of fixed rail infrastructure. This boosted its presence in the high speed rail market. The company is the largest contracting company in fixed rail infrastructure. In UK it is the leader in support services, roads, mechanical engineering, electrical engineering and other disciplines (Balfour Beatty n.d.). Literature Review Generally, a financial or economic crisis is a situation whereby some financial assets or institutions lose a significant share of their values suddenly. In other cases such crises occur due to sovereign defaults, when the stock market of a country crashes, in the event of currency crises, or when there is a financial bubble. Financial crises have been a common feature in both the 19th and 20th century. Such crises have mainly been associated with recessions and panics in the banking sector as noted by Franklin and Douglas (2000). In effect, financial crises lower the paper wealth of a nation or economy and may impact negatively in the real economy especially if it is followed by a depression or recession. Reinhart and Rogoff (2009) in their historical records note that before the 18th century, defaults on public and private debt were a common cause of financial crises. Such defaults lead to the failure of private banks. The two authors also note that hyperinflation and debasement of currencies may have led to financial crises considering that they lead to debt repudiation. Some of the most notable financial crises around the globe include the Danish state bankruptcy that occurred in 1813; the US crises of 1825, 1837, 1901, 1907; the 1997 Asian crisis; the UK financial crisis in 1825 and 1973-1975; and most recently the global financial crisis that occurred between 2007 and 2010. The 2007-2010 crisis was followed closely by the European sovereign debt crisis and a series of recessions according to Reinhart and Rogoff (2009). The latest financial crisis is considered to be the worst such crisis to occur in the world ever since the days of the Great Depression that occurred in the 30s according to Jean-Charles (2008). The crisis according to economists was triggered by a deficit in liquidity in the US banking system. As is always the case with major financial crises, the 2007-2010 crisis led to the collapse of major financial institutions, reduced activity in stock markets, and the near collapse of the construction industry in the United States of America (Jean 2008). Although the crisis worst hit the US, it affected many economies across the globe. In fact continents that are far from North America were so much affected by the crisis that one would think that the crisis started in various places at more or less the same time. Some of the effects of the latest global financial crisis include job losses, prolonged vacancies and the reduced activity in many sectors of different economies. An Overview of the UK Construction Industry For a long time, the UK’s construction industry enjoyed a period of rapid growth, this being the case until the global financial crisis hit the country in 2007. The construction industry made great strides as it mainly focused on infrastructure and commercial buildings. As of 2003, many construction companies preferred to deal in long-term projects that were less risky, at the expense of one-off contracts that were more risky and highly rewarding (Corporate watch 2004) In the UK, the government funds major public building projects usually through the Private Fund Initiative (PFI). This means of funding is usually applied for projects such as roads, schools, prisons, hospitals and libraries. The government mainly contracts private consortiums to design, construct and maintain the project. The consortium provides the funds for the construction work and is later paid back by the government with interest. For about 30 years, the contract lasts with the contracting company charged with the responsibility of managing the construction according to the Global Economic Crisis (2009). With the PFI, the UK’s construction industry has remained stable. For two years beginning 2001, the output of the industry rose by close to 8% (Corporate watch 2004). In 2000 alone, the house building sector accounted for about 39% of the output of the construction industry (Corporate watch 2004). With new homes being exempted from the Sale of Goods Act, about 150,000 homes are purchased annually by UK nationals. This sector is worth well over 1.5 billion Euros each year and is widely unregulated by the government. Annually, the house building sector is projected to grow at a rate of 19% based on the 1995 house prices. In 2000, the infrastructural sector of the UK construction industry accounted for over 9% of all construction activities, its worth set at 6.43 billion Euros (Corporate watch 2004). The five major firms that are awarded tenders for the construction of UK infrastructure include Tarmac, Alfred McAlpine, Fairclough, Budge, and Balfour Beatty. The industrial sector which stands out to be the smallest accounted for about 5.4% of the construction industry’s output and was worth £3.7 billion in 2000. The commercial construction sector, in the same year, accounted for about 19% of the industry’s output. Effects of the Financial Crisis in the United Kingdom Since the beginning of the financial crisis, thousands of jobs have been lost in virtually every sector of the nation’s economy as outlined by The Telegraph (2011). As of December 2008, at least 154,265 jobs had been lost in the country. Just about this time, many countries announced their plans to retrench many of their employees in the UK. The major companies that fall in this category include Diageo, Lloyds Banking Group, the British Council, Axa, Hewlett-Packard, Bay Trading, Legal and General, BAE Systems, and Royal Bank of Scotland, just to mention a few. In overall, the nation has experienced great unemployment, official records showing that at least 2.1 million nationals lacked jobs in the nation representing an unemployment rate of close to 7%. Apart from job losses, the crisis saw a reduction in the UK’s economic growth. While the nation predicted that the country’s economy would decline by 3.5% in 2009, the International Monetary Fund projected the decline to be 4.1%. As a result of the crisis, the British government resorted to setting off deflation in key sectors of the economy, in particular real estate. Methodology The main objective of this research is to establish the impact of economic and financial crisis in the UK’s construction industry. Given the size of the United Kingdom, it would require a lot of resources and time to perform a study of this kind as noted by Brace (2008). It is for this reason that one of the major construction companies, Balfour Beatty, will be used as a case study. This study is therefore pegged on the belief that financial and economic crises affect other construction companies like they affect Balfour Beatty. Of the many construction companies in the UK, this particular company has been chosen owing to its comparative size and for its long history in the industry. Both primary and secondary data are useful in research (Brace 2008). This particular study will be conducted using the two types of data. Secondary data will be obtained by researching books, journals, reliable websites, and newspapers. The secondary data will mainly provide the background upon which the primary data will lean. More specifically, data from secondary sources will be used to answer to the first objective which is to establish the impact of the past economic and financial crises in the UK economy. Primary data on the other hand will be obtained by visiting a construction company and interacting with respondents. There are several ways of retrieving primary data for research studies. For this study, personal interviews and written questionnaires will be used. The two methods will be used for different groups of respondents: employees and management. The employees will be issued with questionnaires while the management staff will be subjected to personal interviews. This will be done so as to obtain as much information as possible regarding the effects of the latest financial crisis on the company and its employees. Since the company has several employees, a random sample of 50 employees will be used for the study. This number is taken considering that the company has a large workforce and taking this sample size is convenient and will well represent the population. The data will be collected in the company’s premises after the necessary permissions have been sought. It is expected that each respondent will take an average of 15 minutes to complete the questionnaire. The personal interviews on the other hand will each be expected to take 25 minutes. The respondents will be thanked for taking their time to participate voluntarily in the study. The questionnaire and the interviews applied to the respondents will mainly be focused on meeting the second and third objectives of this study. In effect, the research will seek to establish how many employees were present in the company before the financial crisis started and how many employees the company currently has. The company’s profitability before and after the crisis, employee remunerations, and the number of projects that the company has completed in the various sectors will also be considered. Once the data has been obtained, excel or SPSS software will be used to analyze the data. During the analysis, specific attention will be given to the analysis of how the financial crisis has impacted on the company and its employees. This actually means that correlation analyses will be conducted. Ethical Issues Since this research involves meeting the respondents in person, there is a chance of breaching the company’s rights to privacy if necessary arrangements are made to visit the company with the intention of collecting data is not sought in advance. In order to avoid such breaches, an application will be sent in advance to the company’s management seeking permission to conduct the study within the company’s premises. The application will highlight the intention, objectives and nature of the study that will be conducted on the set date of the study. It is important to take into consideration the desires of respondents during research. Indeed one of the greatest controversies that affect research in different fields and the provision of medical services is that of informed consent. In order to avoid the issues of neglecting the concept of autonomy, each and every respondent will be briefed about the nature of the study, and their rights to withdraw from it at any point without having to give an explanation. Furthermore, they shall be told that participation in the study is purely voluntary, and free of charge. Yet again, they shall be informed before beginning to participate of the fact that there will be no compensation for participating or not participating in the study. Since no children or people lacking the capacity to make contracts will be involved in the study, there will be no need to seek special permissions that normally applied when dealing with such persons. Given that the there is need to avoid breaching individual personal rights, the research will be conducted without taking records of personal details such as names, addresses, ID numbers. In the event that such information is communicated to the researchers during the study, no records will be taken of such details and therefore personal identity information shall be kept in secret. Every respondent will be assured that the information that they provide will not be used against them in any way and will effectively be used only for the purposes of this study alone. Furthermore, the answered questionnaires will be destroyed soon after the study has been concluded to avoid any chances of breach of privacy after the study. Every possible measure will be taken to avoid emotional and physical harm to respondents to respondents. This will be easily done taking into effect that those in charge of administering the questionnaires or conducting the interviews will be courteous in all their undertakings. Every question asked by respondents or potential respondents will be duly answered taking into account that people’s privacy must not be breached. Furthermore, there will be very little chance of causing physical damage as the researchers will take every measure to maintain sobriety and abide by the requirements of the company. Time Schedule During this study, there are several activities that will be conducted. Considering the value of time as a non-renewable source, the study will be conducted within a period of six weeks. In the event an unforeseeable event occurs that disrupts the work plan, adjustments will be made to complete the study in the shortest possible time. The activities to be carried out and their time frames are highlighted in the Gannt chart that follows. Activity Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Preliminary preparations Reading and Reviewing Literature Sending and receiving Permissions Preliminary study Questionnaire design Administration of questionnaires Conducting Interviews Compiling data Coding data on SPSS and Excel Data Analysis Report writing Editing of Report Submission and Presentation of Report References Balfour Beatty. (n.d.) Company History, Balfour Beatty. Available from [Accessed 2 Feb. 2011]. Brace Ian (2008) Questionnaire Design: How to Plan, Structure and Write Survey Material for Effective Market Research, Kogan Page Publishers. Corporate watch (2004) UK Construction Industry Overview, Available from http://www.corporatewatch.org.uk/?lid=277 [Accessed 2 Feb. 2011]. Franklin Allen and Douglas Gale (2000), Financial contagion. Journal of Political Economy 108 (1), pp. 1–33. Global Economic Crisis (2009) UK Economy Sinking Amid Worst British Financial Crisis Since Great Depression, Available from http://www.globaleconomiccrisis.com/blog/archives/326 [Accessed 2 Feb. 2011]. Jean-Charles Rochet (2008), Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation. Reinhart, Carmen; Rogoff, Kenneth (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press. pp. 496. The Telegraph (2011) Financial crisis: UK job losses, Available from http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3542572/Financial-crisis-UK-job-losses.html [Accessed 2 Feb. 2011]. Milton Friedman and Anna Schwartz (1971), A Monetary History of the United States. Read More