Principal Markets - Infrastructure

This business line includes services for transportation (traffic management, highways, railroads, bridges, tunnels); land development (residential, industrial, recreational, mixed-use, urban and rural planning); and energy (hydropower plants, biogas installations, windmill farms, networks). Starting in 2010, water activities will be reported in a separate business line. The contribution of infrastructure (including water) to revenues in 2009 was 43% (2008: 37%).

Clients

In Infrastructure, most of our work is for governments: municipalities, cities, provinces, states, ministries, etc. We also work for utilities, project developers, contractors and other private sector firms.

Socio-economic drivers and changing client needs driving growth

Quality of life. As living standards increase, people want a higher quality physical environment. This leads to higher investment levels in the built environment, measures to conserve or upgrade nature and landscape, and sustainability as being inherent to quality.

Mobility. In all major urban areas congestion hampers economic development. This results in major investment programs to expand the capacity of roads, highways and public transportation systems.

Urbanization. Population growth and migration to cities cause greater urbanization and a growing number of mega cities. This means investments in residential areas, industrial sites, commercial properties and other facilities, not only in new urban areas but also in deteriorated inner cities, requiring redevelopment and remediation works.

Sustainability. An issue of paramount importance is preserving quality of life for future generations. Sustainability is integrated in everything we do. All our projects are evaluated in terms of their environmental impact with the intent to take mitigating measures in as far as is possible and feasible.

Climate change. This creates unprecedented challenges for delta areas where more than 50% of the world's population lives. The resulting opportunities for our business are many: reduction of greenhouse gasses; lowering the carbon footprint of projects; identifying new water resources; and counteracting the effects of potential flooding through better water management and flood protection.

Energy. The growing population, strong economic expansion and need to reduce emissions cause stronger demand for energy, especially renewable energy. This is a growth driver for all of our business lines.

Outsourcing and privatization. Companies are focusing on their core businesses, while outsourcing non-core functions such as facility management or environmental activities. A comparable trend is taking place in the public sector where the focus now is on policy making, while design and engineering are outsourced to the private sector.

Public-private partnerships. This trend refers to the financing of public infrastructure and amenities through private sector investments. Due to the economic crisis, the availability of private funds has diminished, but as the economy recovers and public spending comes under pressure, governments will start stimulating private investments again to continue implementation of infrastructure programs.

Supply chain integration. Clients ask for alternative delivery methods to achieve better integration in the entire supply chain. This includes Design/Build and Design, Build, Finance and Operate (DBFO) approaches, whereby one party or a consortium takes responsibility for developing, designing and building and, in the case of DBFO, also financing and operating a project. ARCADIS' focus in these projects is on delivering its specialized services to create competitive solutions based on thorough knowledge of local conditions.

Risk participation. Increasingly clients ask or require ARCADIS to take certain project risks. In these cases, our fee is dependent on our performance. ARCADIS has internal procedures to control the related risks.

We actively anticipate these changing client needs by partnering with clients and other parties in the supply chain in order to create more added value for clients. That gives opportunities for bigger projects and larger contracts, requiring a broad and deep knowledge base, adequate risk management and being global but acting local, providing ARCADIS with a competitive advantage.

Present position and strategy

Building on local strength

The infrastructure market is predominantly a local market, servicing national, regional and local governments, but also railway companies, utilities, mining firms, developers and contractors. In-depth knowledge of local conditions and client needs is critical for success. ARCADIS has built strong local positions that enable it to anticipate market developments, deliver tailored solutions and leverage specialized global expertise.

SWOT analysis

Ambition

Recognized global player leading in selected segments

Our ambition is to be a recognized global player based on strong home market positions. Our organic growth target is 6% per year with margins of between 8% and 9%.

To achieve our ambition we continue to build and expand strong home market positions through organic growth and acquisitions. We aim for a top 5 position in major geographical markets (for the United States a top 10 position). In addition, we want to expand our leading positions in focus areas in which ARCADIS has extensive specialist expertise that can be leveraged internationally. These are:

• Public transportation. ARCADIS is an expert in rail infrastructure with a unique combination of civil engineering and rail systems skills which allows us to benefit from growing demand for public transportation;
• Transportation corridors. ARCADIS has a strong track record in complex infrastructure projects, including bridges and tunnels. The focus is on large, multidisciplinary projects, including design-build and Public-Private Partnership (PPP) schemes.

Strategy implementation is driven by the Global Business Line Team for Infrastructure, which as of 2009, is under the leadership of a Global Infrastructure Director. The focus is on Global Knowledge Networks for each of the focus areas, to exchange knowledge, develop new technologies and enhance sales and market development. Initiatives have been taken to further outsource low added value services in order to improve competitiveness.

Recent results

Strong performance due to government spending

In most markets, public spending for infrastructure projects remained robust, with some governments adding budget or accelerating projects to limit the downturn. This resulted in solid organic growth of 6% on gross and 4% on net revenue. The difference was caused by work on Brazilian hydropower projects with high subcontracting. Organic growth was especially strong in Europe. Acquisitions growth came mainly from the merger with Malcolm Pirnie, to a small extent offset by divestments in 2008 and the sale in late 2009 of engineering activities in Germany. The margin was 10.8% (2008: 11.4%). When corrected for the sale of hydropower projects in Brazil in the last quarter of 2008, the margin in the underlying business increased by 0.7%. This was mainly the result of enhanced profitability in the Netherlands, Belgium and the United States.

Outlook

The infrastructure market is expected to remain robust in 2010. Economic recovery is still fragile, so governments continue to invest. In Europe, the road and rail market continues to offer notable opportunities. In the Dutch market, several major projects and programs are generating a good workload, including the A2 Maastricht tunneling project and the extensive upgrading program for the existing railway system. Demand in the Central European road market will remain high, while the Polish rail market is expected to pick up again. In France, we are involved in tendering procedures for several major high speed railway projects based on design-build, while also in Belgium large design-build projects are planned. In the United States the stimulus package is expected to have a positive impact, although it remains to be seen whether this sufficiently offsets softer demand from municipalities. Additional work can be generated through synergy with Malcolm Pirnie, while we will also benefit from leveraging their capabilities internationally, with a focus on Brazil and Chile. Climate change continues to be an important growth driver for water management, including flood protection. As Brazil and Chile were less impacted by the recession, we expect investments to pick up again, especially in Brazil. With work on Retiro Baixo being finished, this will mainly have an impact on net revenue. The Brazilian market will also be supported by the 2014 football World Cup and the 2016 Olympics. In 2010, central governments will continue to invest in infrastructure, but local government spending will be impacted by the economic crisis, as we have seen already in both the United States and Europe. Therefore, we expect infrastructure growth to slow down somewhat compared to the strong growth of 2009. The extent to which this will happen is largely dependant on the impact of the stimulus package in the United States.