We investigate the paradox of the Netherlands' infrastructure sector, which has experienced persistently low profit margins in recent years, but also very few bankruptcies. How is this possible?
The profit margins of Dutch building (residential and non-residential) construction companies have increased significantly in recent years. Growing demand for new construction, the renovation of homes and commercial buildings, combined with more efficient construction processes (through digitalisation and industrialisation), have allowed companies to increase their margins.
In the infrastructure sector, on the other hand, which covers roads, railways, bridges, sewers, electrical grids, and so on, margins were already relatively low 10 years ago and have remained low.
Indicative Dutch profit margin (operating profit/total operating income)
1. Large infrastructure companies have incurred losses on large risky projects in recent years, where costs got out of hand. This has had an impact on the overall returns of the entire Dutch infrastructure sector.
2. The number of clients is limited in the infrastructure sector, primarily consisting of municipalities, water authorities and Rijkswaterstaat (Dutch Directorate-General for Public Works and Water Management). This limited pool of clients gives them buying power, which keeps profits low for construction companies in the infrastructure sector. Due to declining volumes, competition has further intensified, putting pressure on prices and margins.
3. Infrastructure companies generally have more machinery at their disposal compared to building (residential and non-residential) companies. This is evident from the higher average annual investments they make, particularly in machinery and transportation vehicles. This makes infrastructure companies more capital-intensive and increases fixed costs. As a result, variable costs are relatively lower than those of building companies. This brings additional risks when order books are poorly filled. Taking on projects below cost due to a lack of profitable contracts, just to cover a portion of the fixed costs, therefore happens more frequently in the infrastructure sector, which further erodes profit margins.
Remarkably, despite lower volumes, high investments and consistently low profits, bankruptcies have not increased. In 2022, fewer than 20 companies in the infrastructure sector went bankrupt per 10,000 companies, compared to more than 120 in 2012. This decline roughly aligns with the decrease in bankruptcies in other subsectors of the construction industry.
