Balfour Beatty has said it is withdrawing from the gas and water sectors because future opportunities do not match its bidding criteria.
Experts have told Utility Week that the industry should see this as a “wake-up call” that contractors are being squeezed out of the market and that more exits could follow.
In its interim results this week, Balfour Beatty said that while it would continue to manage two long-term gas contracts until the end of the RIIO-GD1 period next year, it no longer considered the market viable “because of the unfavourable working capital and onerous terms and conditions”. It said its two existing projects had historically underperformed and had also been hit by the coronavirus pandemic.
In water, where the company has worked on major projects with Thames, Anglian and United Utilities, it said that AMP7 contracts are “generally being awarded on terms that are not acceptable”. Therefore, it expects to only retain the Anglian contract.
Overall, revenue in the utilities division was down 7 per cent to £258 million for the first half of 2020, while the order book dropped 20 per cent to £800 million. An overall loss of £26 million was reported for the six months.
The contractor will still have a presence in the utilities sector through high profile schemes such as the Viking Link interconnector and Hinkley Point C.
However, sources told Utility Week that it was a significant move for the company to publicly turn its back on water and gas. It follows the decision by Skanska to exit utilities contracting last month.
One water sector insider said: “This shouldn’t be a surprise, as the calls of unintended consequences were there throughout the PR19 process. Companies have been hammered in the price review and they have passed that down the chain. For the big Tier 1 contractors, there’s just not enough incentive left for them to play in this market.
“Hopefully this will act as a wake-up call for the sector and the regulator that suppliers cannot be expected to absorb all these pressures. There has to be something left for them.”
Another source told Utility Week that Balfour Beatty’s departure was part of a wider trend of Tier 2 contractors being favoured.
They said: “The likes of Clancy and Murphy have really invested in the relationships with their clients and because of their ownership structure can take a longer term view. They’ve also arguably been more agile in identifying efficiencies.
“With some of the Tier 1 contactors it’s been a bit of a Woolworths approach – they’re trying to offer a bit of everything and it’s just not clear what they want to be.”
But the source echoed that utilities cannot take their contractors for granted.
“There is a bit of a sense of complacency that there will always be people to pick up the work but if that is the culture, people will eventually stop bidding. There are other areas for contractors to bid in and if they see better returns there, why wouldn’t they?”
For Stephen Barrett, director of strategic accounts at Energy & Utility Skills, the key concern is around losing the expertise of contractors who have worked in the industry for many years.
He added: “There is a potential for reputational damage here because young people or jobseekers looking at the sector for the first time will wonder why this company is turning its back on the sector.
“We need to stabilise the situation and ensure that the knowledge and expertise built up in the supply chain isn’t lost and that we are sending the right messages to the future workforce that they can contribute to the net-zero ambitions making this an attractive sector.”
Utility Week explored the squeeze on contractors, and whether it threatened the resilience drive, in a report earlier this year.