2.1. Monopoly: Pure monopoly exists when there is a single supplier of a good or service in a particular market. Monopoly power exists when a firm controls 25% or more of that particular market. The Pareto Principle comes into effect here, where 20% of construction companies will acquire 80% of contracts. An example of this in Ireland is John Sisk & Sons Construction, Sisk has undertaken the majority of the major government funded projects in Ireland such as, The National Conference Centre, The Matter Hospital, Dun Laoghaire Library, The Aviva stadium, Croke Park, and numerous other major government works.
One of the major reasons in why not many companies can compete against Sisk is the fact the company is self- funded (cash rich). The firm doesn't need to borrow to fund projects. With no long term debt the companies overheads are substantially lower than most of their competitors. This leads to more competitive bids which provide the Irish Government with greater value for money.
Another case and the biggest case of monopoly in the Irish construction sector is that of CRH (Cement Roadstone Holdings). Irish cement and Roadstone merged in 1970 forming CRH and within a few years had acquired many small cement quarries and Irish Industrial Explosives meaning independent quarry and concrete producers were forced to buy key raw materials, cement and explosives from their biggest competitor. 1CRH went on to turn itself into a vertically- and horizontally-integrated near monopoly, free from government sanction. Being vertically integrated, it controlled all stages of the production process for explosives, cement, aggregates, ready-mix concrete, concrete products, ground limestone, tarmac and superfines for the production of fertiliser and animal feedstuffs. It was also horizontally-integrated since it controlled the majority of the quarries and concrete plants throughout the country. (Maye, 2012)
2.2. Monopolistic Competition: Monopolistic competitors differ from monopolists in that monopolistic competitors make zero long-run profit. In the construction industry monopolistic competition occurs when there are many firms in the same market, for example house building. A large number of building firms compete in the same market, making that particular market (house building) extremely competitive as no builder can influence market price for their particular product. This is because each firm has potentially thousands of competitors. The seller (developer) sets the price in the monopolistic home building industry. There are no barriers to entry for a monopolistic firm, barriers such as government rules, start- up costs, licenses.
Within the 'bespoke construction industry' monopolistic competition is very rare as the contractor will set the price instead of the client due to the fact the end product is rare and there are more elements of risk involved in completing the works. Unlike the developer advertising to sell the finished product, the construction contractor will be invited to tender for this work knowing that there will be certain amount of competitors within the market but not an oligopoly. There are certain building contractors who specialize in one off bespoke house building projects, but there are too many of these contractors for an oligopoly.
2.3. Oligopoly: Oligopoly occurs when a particular market is controlled by a small number of firms. Firms within this market can choose to be interdependent, meaning it cannot act independently of another firm or collude with other firms to maximize profits. Interdependent firms will set their own strategies on whether to (A)compete or collude with rivals,(B) set new strategies or wait and see what their rivals do or (C) change prices or keep prices constant.
Oligopolies will usual maintain their position of dominance due to the Barriers of Entry for other companies to enter that market. These barriers include high set-up costs, high R&D costs, superior knowledge and exclusive contracts, patents and licences. Disadvantages of oligopoly include Cartel-like behaviour which reduces competition and leads to higher prices and reduced output. While a distinct advantage would include the fact that supernormal profits are used and innovation and R&D in which sense the consumer may gain.
Oligopoly is a huge problem within the construction sector as was seen in the UK in 2008-2009 where over 100 firms were fined 130 million pounds for collusion within the industry. Four of the biggest construction companies in the UK received largest fines for colluding on prices on contracts involved in the investigation included public authority work on schools and hospitals, as well as private tenders for apartment blocks. All of these works would fall into the bespoke construction category.
2.4. Homogenous market: A homogenous market is a market place where the same type of product is sold (3 bed houses for example) they each provide the same function but with different features and designs. Within the domestic house building industry a homogeneous is clearly evident as most houses/apartments have nearly the same designs, the same function and depending on location roughly the same prices. A bit confused on this part Joe for bespoke construction industry
2.5.Asymmetric information: This occurs when one party in a transaction either the buyer or seller has superior information about the product when the transaction is taking place.2Asymmetric information gives rise to opportunistic behaviour, which is the primary cause of loss of faith and increased risk in the construction market. (Dumitrascu, 2012). It means that some participants possess information that others do not. For example, a trader may obtain some private information of which the other traders have no knowledge. The trader with this information can take advantage of the situation for his or her own profit.
Within the bespoke construction industry especially Design & Build asymmetric information between client and contractors is very common. This is mainly because both parties do not know or trust each other and each provide each other with incomplete information as each party does not want to show a potential weakness. At tender stage and during negotiations the contractor knows more about their own limits than the clients, such as the quality of personnel, the quality of materials, the construction methods, and their technology.
During construction the clients cannot fully follow if the contractor is following the contract in terms of specification and material. To win a contract, the contractor can offer their lowest possible prices and best quality to win the contract, but during construction inferior produces or equal and approved products are used. In Ireland BAM Building Contractors have built a reputation of this practice.
3.1. Bank Project Finance. This type of financing arrangement can occur on large and small projects, such as housing developments, shopping centres, commercial buildings or one off houses. Payback usually occurs within five years or when the project has been completed and sold. The developer will usually have to put forward up to 15% of the potential loan. These loans are usually non- recourse or limited recourse loans. These type of loans were hugely popular with developers in Ireland before the economic crash.
Developers took out huge loans to buy up land banks for development. When prices fell sharply most developers could not repay the banks and went bust. So many developers went bust that the banks themselves could not afford to repay monies owed leading these banks into a government bailout. Presently banks prefer to see how much money the borrower is willing to invest themselves into a project. Projects that are pre-sold or let and have a rent agreement for between 5-10 years with a potential tenant offer more security to the banks than speculative developments.
3.2 Forward Loan. A financial institution can also offer a developer a forward sale loan. This occurs when a developer decides to build a new office and the financial institution wants to buy/lease that office when complete. Because there is less risk involved on the banks behalf, the developer can get a loan with lower interest rates off that bank or get a bridging loan until the project is complete.
3.3. Mezzanine Finance Some financial institutions will offer developers Mezzanine 'nance. This occurs when the developer cannot afford the original 10-15% capital up front. These loans are collateralized by the developers stock rather than the project itself. Interest rates on these loans can be in the region of 15-20%. 1Mezzanine funding, when used correctly, is not for cash strapped developers, it is for developers who have the capacity to do multiple projects and therefore give them the best possible return for the equity they have available.' (Advisor, 2012)
3.4. Patnerships. The most common type of partnership withinthe construction industry is the Private Public Partnership arrangement This financial arrangement occurs when private sector investors finance public projects and governments provide the resources ie land. By funding these works the private investor will take the operating profit. Examples of these arrangements can be toll roads/bridges. Also social housing can fall into the public private category. There are also othertypes of partnering arrangements such as developer/developer or developer/ Contractor, Contractor/ Contractor arrangements whereby each partner has different resources/ finances and they combine resources for the sake of the project more profit.
4.0. Equity Project Finance: When a developer cannot raise enough capital because of lack of cash flow, to apply for a loan from the banks, they can go into business with a sponsor or partner. This sponsor/ partner can be a company, an individual, private pension fund, insurance company or private equity financing firm. Equity loans are basically financial investments for share ownership in the business. Equity holds the lowest priority of funding contributions on a project, other lenders such as banks have the right to project assets and revenues before the equity contributors can obtain any return. Equity contributions bear the highest risk and therefore potentially receive the highest returns.
4.1. Forward funded loans: Usually involve investors buying site or numerous sites, providing the finance during the construction phase, with the developer receiving a final payment based on the value achieved after deducting the development costs. This final payment can be a lower sum due to the fact there was less risk involved to the developer. These loans are usually provided for pre-let properties such as hotels, supermarkets, distribution centres, and high end office blocks. Investors prefer an agreement in place of between 15/20 years before committing funds.
4.2. Joint Ventures: 1 A joint venture is a speculation for profit in which the risks and rewards are shared by two or more parties, which have formed an ad hoc association to combine their expertise, capital, property, skills and knowledge in order to execute a specific project. (Anon., 2004). The most common reasons why Joint Ventures are formed are the project is too large, or complex, for a company to undertake with its available resources or the project requires finance, specialist skills, abilities, which a company one of the companys is unable to provide.
Participantants in joint ventures range from banks, developers, private pension funds, building contractors and government. An example of a joint venture project in my local area was a Joint Venturing Partnership between between SIAC Construction Ltd and the Spanish Construction Company Ferrovial Agrom??n S.A who between them upgraded The M50 motorway in Dublin the busiest motorway in the country. Apart from road construction joint ventures can also be utilised in the construction of football stadiums such as the Aviva (Sisk, BAM, McNamara Construction).
5.0.Corporate Finance for development: Large scale construction companies can finance developments by issuing corporate bonds. Investors in corporate bonds will generally receive a higher yield from corporate bonds compared to government bonds because there is a higher risk of default. In the construction/ development industry the main source of corporate debt instruments are Multi-option 'nancing facilities (MOFFs), Convertible loans, Commercial Paper and Deep discount bonds (DDBs)These sources of finance will be explained and examples of circumstances in which these types of financing arrangements are used in construction.
5.1. Multi-option 'nancing facilities (MOFFs). These are available to only largest construction and development companies. They are used for short to medium term borrowings of between 50 -300 million. This funding is available in the European market. MOFFs are a syndicate of banks that can be in different countries offering different currency that will provide cash support to the borrower. Attached to MOFFs are a committed syndicate and a non- committed syndicate. When the borrower needs money the banks within the committed syndicate are invited to bid to offer the cheapest finance. If these banks fail to offer what the borrower requires, the borrower can ask lenders within the non -committed syndicate for short term funding at lower rates.
5.2. Convertible Bonds: Large development companies can generate finance by issuing convertible bonds at a low rate of interest. Investor of these bonds can convert them into ordinary shares of the company but at a higher price than the current share price of the company. Examples of this type of arrangement can be found in Austria and Australia where Housing Construction Convertible Bonds fund social housing developments.
5.3. Commercial Paper: Large companies with good credit ratings can raise short term cash by issuing short term commercial paper. Large development firms can either issue their own commercial paper or negotiate below-prime construction financing with lenders. This financial arrangement happens when the borrowing company issues an IOU to investors at a discount whereby an investor can pay 96euro for paper that is worth 100 euro in one weeks time. Bank finance can be paid settled with short term commercial paper which will reduce interest paid to the banks by the developer.
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