On Aon Podcast: Insights into Construction and Building Resilient Economies

On Aon Podcast: Insights into Construction and Building Resilient Economies
April 16, 2024 14 mins

On Aon Podcast: Insights into Construction and Building Resilient Economies

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Episode 73: Aon experts discuss today's global construction industry.

Key Takeaways
  1. In this episode, Aon experts identify the role of the risk capital market in addressing client needs.
  2. Aon’s experts share insights into key renewable energy and energy transition construction projects.
  3. Episode 73 addresses inflation, workforce shortages and geopolitical factors.

The construction industry is adapting to a variety of stresses and pressures and working to increase resilience and sustainability in a changing climate. Host and Aon’s Chief Commercial Officer of Global Construction and Infrastructure, Tariq Taherbhai, is joined by Aon’s Global Industry Specialty Leader, Construction and Infrastructure, James MacNeal, to discuss today's global construction industry.

Intro:
Hi everyone, and welcome to the award-winning “On Aon” podcast, where we dive into some of the most pressing topics that businesses and organizations around the world are facing. Today we hear from James MacNeal on what’s happening in the construction industry. Now, please welcome this episode’s host, Tariq Taherbhai.

Tariq Taherbhai:
Hello everyone. My name is Tariq Taherbhai and I'm the chief commercial officer of construction and infrastructure at Aon. In today's On Aon episode, we're looking at one of the world's largest industries, the construction industry, and whether the industry can thrive to deliver us a more sustainable and resilient future. There is a significant amount of construction taking place globally, but workforce shortages, inflation, higher financing costs, and geopolitical tensions are making the planning, financing, and delivery of construction projects riskier. In addition, climate change means that extreme weather is impacting projects more frequently and with more severity. So, we're constantly considering some key questions here at Aon. How can the construction industry adapt to deal with all of these stresses and pressures? And how can the industry help our built environment become more resilient and sustainable in the face of a changing climate? Well, I'm super excited. With me today to discuss all of this and more is James MacNeal, Aon's global leader of construction and infrastructure. Thanks for being here today, James.

James MacNeal:
Thanks for having me, Tariq.

Tariq Taherbhai:
Now in our discussion, we're going to look at what's happening in the construction industry, what our clients are concerned about, and how they can better approach industry challenges. So, let's get started. James, maybe we'll start at the very top. Can you please tell us what's happening broadly in the global construction industry today?

James MacNeal:
Well, there's a question. What's going through my mind Tariq is that famous quote from the great Charles Dickens: "It was the best of times, it was the worst of times." It truly feels like the construction industry is bifurcated. For example, residential construction is down pretty sharply across North America and Europe, really because of the elevated interest rates. And China, you've had that long-term real estate slump there that continues. Whereas on the other hand, we're seeing a real surge in construction in certain other sectors of the construction industry. Put simple, investments in manufacturing, infrastructure, the energy transition are really fueling global demand construction, especially in North America and Asia. The U.S. government in particular has been particularly effective in government stimulus packages that are really causing a real boom in construction. I mean to name some of the acts that they put out there. The Infrastructure Investment and Jobs Act of 2021 earmarked $1.2 trillion in federal funding to help states and local municipalities upgrade and build all sorts of infrastructure and everything from roads, rail, transit, airport, anything you can think of that states would need from a public infrastructure point of view.

They also brought out the Inflation Reduction Act of 2022, IRA for short, which many have called the world's largest climate bill, and it directs over $300 billion to investments in green energy innovation, facilities and infrastructure. And really as a direct result of this act, the IRA, we are seeing significant investments in the U.S. in all sorts of manufacturing facilities for electric vehicles, solar batteries and wind technologies.

And finally, not to forget the CHIPS and Science Act of 2022, that's led to lots of new investments in semiconductor manufacturing. So, there's so many acts out there that are causing a major increase in construction and other countries have seen this. They've seen what's happened in the U.S. and how effective it's been. So not to be outdone, they've responded in kind with their own incentives for manufacturing and we're seeing a lot more investment in Europe and Asia we believe over the coming years.

And then I think I should call out Saudi Arabia in terms of a surging economy for construction. Saudi is really investing in tourism-related infrastructure to create new revenue streams really as part of its Saudi Vision 2030. And this has driven, I mean, unprecedented demand for all types of construction from hotels to airports, but also the utility infrastructure to support that.

And of course, there's this major global boom happening across the world for all sorts of construction of renewable energy projects and other projects related to the energy transition. So, you're seeing construction of offshore wind farms off the shores of Europe and Asia and solar farms really anywhere in the world where the sun shines. And in addition to that, we're seeing the construction of multiple varied energy transition technologies. Many of them are new like carbon capture, green hydrogen battery storage to name but a few.

Tariq Taherbhai:
Wow, that's really just an extraordinary list, James, with so much happening across the world, multiple sectors. So exciting. It really just begs the question though, I mean, we live in a volatile world, so what are our clients concerned about as they navigate what I'm sure are risks across weather, inflation, workforce and geopolitics? What are you hearing from them?

James MacNeal:
So, there's three there. I'll start with weather. The climate change effectively and the impact that is having on the weather. Everyone can see that our floods, hurricanes, droughts, wildfires are becoming more intense as a direct result of climate change. And in addition, interestingly, this extreme weather, is not just creating the impact of natural catastrophes, it's also making them more frequent. So many of our clients are experiencing one in 500 year flood events every few years now. Heavy rains for example, can render building sites really unstable and create significant delays. Excavated ground can collapse and you can't operate equipment in standing water. It's just too unsafe. High winds can flatten structures mid-project and damage job sites.

And the problem you have with job sites is they're not completed buildings. So, unlike a completed building that hopefully can stand up to the likes of hurricane and windstorm, when you're a half-built project, you're much more vulnerable. And so, clients are rightfully concerned about making sure they have sufficient liquidity on hand to fix and repair the damages caused by these events. But crucially, they're now asking the question more and more, "What else do I need to do in the design construction operation of this asset to make it more resilient in the face of this changing climate?"

Tariq Taherbhai:
I mean, it seems like climate change is so all-encompassing, but I guess we can't forget the other risks that continue to exist. So, are they also concerned about inflation, workforce, geopolitics, any others?

James MacNeal:
Absolutely. Arguably inflation is now moderating, but everyone's still concerned that high interest rates have really dampened activity in certain sectors of the industry. Clients continue to be concerned that inflation can strike again at any time. And if you look at the geopolitical tensions in many parts of the world, for example, the slowdown of shipping in the Red Sea is really reverberating through the global supply chain. Construction sites worldwide are so reliant on shipping and marine cargo. And so, the real worry at the moment is the winter season in the Southern Hemisphere with all this issues in the Red Sea. And our clients are rightfully concerned as what that means throughout their goods around in the Cape of Good Hope.

And then your last point, the workforce Tariq is becoming more and more of an issue. In our recent Aon Global Risk Management Survey, the failure to attract or retain top talent and workforce shortages both featured in the top six concerns of our construction industry clients. I mean, those risks have been rising in the minds of clients now for many years. And it's really because there's a lack of trained staff to meet the unprecedented global demand for large construction projects. So, it's a rare and great problem for the construction industry to have where you've got so much demand, but who's going to build all these major projects?

And really it's a change in skill set as well. In the old days, senior project management staff, they were there for their technical ability. But if you look at the size of some of these projects now, these are multi-billion dollar projects, very complex projects with billions of dollars of cashflow going through them. Project managers need C-suite skills in order to manage these projects nowadays. And so that's a real issue for many people.

And just to quote a couple of stats at you, the workforce shortage in the US alone for construction was projected to be over half a million in 2023, and estimated to still be short, 350,000 skilled construction workers in 2024. Canada, which has been hit by a national housing shortage, still has a job vacancy rate in construction this year of 80,000 vacancies. And the European community just did a recent study and reckoned that they need nearly 2 million more workers in the construction industry to meet the build demand. So it's a global issue and it's only on the rise. We really need to work with the industry to find solutions for this. Bringing more diverse talent into the industry, re-skilling people from other areas of industry to come into construction, which is really having quite a boom.

Tariq Taherbhai:
James, just listening to you talk and describe about all of these various risks impacting our clients, really just naturally leads me to sort of the next question, which is what are their traditional risk capital partners doing about any of this? I mean, are they responding to our clients' needs in your review?

James MacNeal:
I think there's two answers here. The risk capital market, so our focus on the insurers that I would term as the mainstream construction market, they are responding adequately on conventional construction opportunities where I always argue that they're responding less adequately when it comes to supporting a more sustainable future. So, the first part of my answer, the conventional construction, they're doing pretty well, but there's a finite amount of capacity in this market. We haven't seen many new entrants in recent years counter that. Some of the traditional players in many of these markets have been writing construction for decades, hundreds of years even. And these traditional players are increasing their capacity to take advantage of the favorable underwriting conditions, but they are being selective in their risk approach, and they are looking at higher, higher cost around that. I mean, this is the crucial point that the underwriters are very selective in the risk they write.

And if, for example, a project is in a cat exposed area, it can create a real issue in terms of higher rating and not getting the capacity we need. They're imposing more and more and lower limits for perils like windstorm, flood, earthquake, et cetera. So, it's really important that construction clients and their brokers increasingly explore other options for risk transfer. Because of the sheer volume of risks out there and the size of risks, you can't just rely on the traditional construction market anymore. You have to look at parametric solutions and greater utilization of captives.

Second part of my answer when we're talking about renewable construction and frankly greener construction, I think the industry needs to be much more supportive here around things like new building materials. As we're really trying to scale these products up into the mainstream construction industry, we really need the industry as well to support our clients into the transition into a cleaner energy economy. Understandably, insurers are still very cautious about some of the newer technologies such as green hydrogen, and we really need to get behind and support this. In terms of the green construction materials, mass timber is the future, but frankly, it's only that prominent in places like North America and Northern Europe. It's not really scaled globally, that's partly due to supply chain, but we need to see more insurer appetite supporting it.

We need insurers to support other green forms of concrete, low-carbon steel and other technologies that have been invented. And we really need insurers to continue to deploy their capacity in cat-exposed areas and really share their insights because they're the most qualified, they're the best qualified people to support this. They've got all the data, they've got all the experience, so they need to work with our clients on helping structures become more disaster proof and more resilient. It's a team effort.

Tariq Taherbhai:
Thank you, James, for walking us through all of the risks, it's such a volatile landscape and I really sort of, I think the very natural question is how are the risk capital markets responding to our clients' needs? And I guess part of that is, are they?

James MacNeal:
I mean, we are lucky. We work with the very best clients in the world who are themselves sophisticated, risk managed enterprises. And I think the point I made to them is they need to make sure they're educating and sharing with the risk capital community around everything good that they're doing. As I said earlier, it's a team effort and it's in everyone's interest, the client and insurers to make these sites, to make these construction projects more safe and resilient.

And frankly, our clients are the best advocates of what they do. We like nothing more than the clients to have a direct relationship with the risk capital providers, and we recommend they do that early on in the relationship. So, as we are going to market as early as possible on these major complex high capacity projects, it's important that underwriters, many of whom are ex-industry engineers themselves, they're interested in the project. They want to help and share their ideas with the client's engineering team, with the client, and work together on how they can make the risk more attractive and frankly less of a risk. So, the earlier we engage with insurers in the process and get the right information to allow underwriters to understand the risk, any innovations, idea, and operations. As I say, it's a team effort and it's a really important message to get across to our clients.

Tariq Taherbhai:
Well, that's so helpful, James. I mean, I think our clients always appreciate the actionable insights that we bring to them. So, thank you. And thank you for taking us through your view of the global construction industry. I think from where you sit, it's clear that you see what's going on across the world and are so well positioned to share those insights with us today. So, thank you so much for joining us today, James.

James MacNeal:
Thank you. Thanks for having me.

Tariq Taherbhai:
Well, and that's our show for today. Thank you all for listening. In the next few months, we'll have episodes discussing the cybersecurity landscape, global benefits, and much more. Until next time.

Outro:
Thanks for tuning in to the latest episode of “On Aon” with our episode host, Tariq Taherbhai, and today’s experts, James MacNeal, for a discussion on what’s happening in the construction industry. If you enjoyed this episode, don’t forget to subscribe wherever you get your podcasts, and stay tuned for our next conversation featuring industry experts bringing you the latest on topics including climate risk, workforce wellbeing, ESG trends, and much more. Be sure to check out our show notes and visit our website at Aon dot com to learn more about Aon.

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