Storm clouds reappear over Scotland's construction industry

AS THE country wakes up to another rain-soaked morning, it won't just be those who are making their way to St Andrews for the closing day of the Open who will be cursing the recent change in climate.

For several months it looked as though Scotland had escaped the worst of the storm - both meteorologically and economically. But along with the return of the dreich, grey skies that have typified Scottish summers over the past few years, so too have the economic forecasts for the next six to 12 months grown gloomier - and nowhere more so than in the construction sector.

Andy Mallice, managing director of Rok in Scotland, is praying for a miracle. While the first six months of this year brought some welcome surprises with a solid supply of work from the firm's biggest client, drinks major Diageo, Mallice is concerned that next spring could mark a return to the darkest days of the recession.

For a while it appeared as though the UK economy had got away with it: Britain exited recession in the fourth quarter of 2009 and surveys during the first three months of 2010 hinted at a stronger recovery than most forecasters had banked on. But recently Mallice says the winds have changed and memories of two years ago - when well over 20,000 jobs were lost in the Scottish construction industry - have resurfaced.

"Right now we are doing well as a company because we have some purple patches with some private clients," says Mallice. "But a year from now the pipeline of work is not what I would expect it to be."

The construction and property industries were some of the biggest victims of the recession as major building projects collapsed, such as the HBOS global headquarters planned for the site of the former Scottish & Newcastle brewery in Edinburgh's Fountainbridge.

Although things got pretty bleak for Scotland's building firms in 2008-09 - losing more than 8 per cent of their workforce - it could have been much worse had it not been for the public sector.

Lindy Patterson, partner at law firm Dundas & Wilson, points out that the number of administrations, particularly among commercial building firms, did not reach anywhere near the Armageddon expected, thanks mostly to government contracts. As private sector work fell off a cliff during the recession, the Scottish Government, local authorities and public sector quangos sought to fill the void by accelerating funding and contracts.

However, with the public sector now facing some of the most severe budget cuts for a decade, contractors fear a second crisis is near, says Patterson. And with no white knights on the horizon, construction experts warn the second dip could be steeper than ever.

If Savills' monthly survey of building activity is anything to go by, Scotland's builders have cause for concern. Savills' latest commercial development activity index revealed the biggest monthly decline in public sector work for 17 months, pushing the survey to its lowest level since July 2009.

Michael Pillow, head of building consultancy at Savills, warned that parts of the industry which have only been kept alive by taxpayer-backed contracts could flat-line. "Public sector austerity measures are now firmly impacting on the development market, with development activity for public sector clients now in double-dip territory," he said.

For Michael Levack, chief executive of the Scottish Building Federation, the Savills index confirms his worst fears. Confidence in Scotland's building sector has returned to lows not seen since the depths of the recession, he says.

He is anxious about the fate of small and medium-sized contractors which risk being edged out as the larger firms downgrade and compete for contracts they wouldn't normally bother with during better times. He warns that more company failures, particularly at the SME level, are a certainty: "There's probably a dam that is ready to burst."

In the long term Levack fears the sector will be reduced to a handful of large firms. "We always hear about the top four teams in the English (football] Premiership. In construction in the UK we are going to get the 'top two'," he says.

According to Patterson, the dam has already begun to leak. Earlier this month, Clachan Construction, one of the mid-tier players but a major employer in Perth, collapsed placing 150 jobs at risk.

"There are more people competing for less work so you have the large and medium-sized players competing in the same market. That's going to bring its own challenges and one of the big questions is: will there be a lot of undercutting going on?

"It's going to be a much smaller market, that's for sure," Patterson concludes.