Richard Whitfield
A recent article in The Economist points out the low productivity and poor performance of the global construction industry. It identifies several things that governments and others can do to reduce this major drag on world growth and thus improve the lives of almost everybody.
The article notes that construction accounts for around 13% of annual world output, but it is highly cyclical. Moreover, around 90% of global infrastructure projects finish late (if at all) and over budget – and we have seen this again and again in Macau government projects. Additionally, the construction industry has been plagued by low productivity growth for decades; e.g. it now achieves only 1/4 of the productivity growth of manufacturing. Tragically, construction productivity has been flat or even fallen in the developed world in recent times, and astonishingly, construction productivity in the USA is now only 1/2 what it was in the 1960’s! My own observations, and extensive discussions with expatriate experts indicates that construction labor productivity in Macau is much lower than in the developed world, and lower than labor productivity in China.
In many industries, consolidation of smaller businesses leading to economies of scale and investment in production equipment is an important driver of productivity growth. But globally, the construction industry is still very fragmented, with many, many subcontractors. (Globally, only 5% of construction companies directly employ more than 10,000 workers, whereas 25% of manufacturing companies are at least this large.) It is also very labor intensive. Unfortunately, the many small subcontractors compete with each other driving down overall profits and they cope with business downturns by sacking workers. When the next boom comes they hire the workers again but resist equipment investments because these will lead to major losses in the next downturn.
Another major problem in the construction industry identified in the article is widely varying building codes which means that nothing can be standardized. For example, in the USA there are 93,000 municipalities, each with their own (different) construction rules, and many of these rules limit or prohibit new, innovative building design and construction methods.
The article suggests several ways that governments can improve construction industry productivity growth and innovation, any many of these are applicable in Macau. It focuses on government, because 20-30% of global construction is done by governments.
Firstly, construction regulations can be harmonized and simplified and made more flexible to encourage innovation. This can certainly be done in Macau, where many construction rules are very peculiar and different from international standards.
Secondly, governments can publish their longer term construction project plans so that construction companies can know what the future holds for them. Governments should also spend more during construction downturns and less during construction booms to help minimize the cyclic nature of the industry. A regular, recurring complaint about the Macau government is its lack of long term planning and transparency.
Government construction projects should also mandate the use of important technologies and methods to encourage the industry to improve. For example, many years ago the Hong Kong government mandated that only ISO-9000 quality management certified construction companies could bid for government projects, which significantly improved construction quality there.
Governments can also write construction contracts that encourage subcontractors to invest in technologies that speed up their work and reduce costs and giving them bonuses for early completion.
The problems are well known and clear, and several ways to improve the situation are known, it is well past time for the Macau government to push the local construction industry to get to world standards of productivity. It is a big industry here and construction management skills and expertise can be readily exported to diversify the local economy.
