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Released 22 July 2016 - Copyright 2016 - Bricad Associates 1

BACKGROUND NOTE survey.peterboswell.net Accompanies the survey summary, see EU Survey Update 2016 FIDIC-EFCA Consulting Engineering Industry Survey 2016 Update – European Union

Benchmarking the demand for consulting engineering services generated by construction and industrial investment to the supply from national accounts for the 28 European Union (EU) countries confirms the ability to provide accurate forecasts. - Total market and non-market demand

- construction investment in 2008-15 generated 63% of the total demand;

- the remaining demand is for industrial investment where in addition to plant investment and one-half of the 6% for own-account design some 12% of the demand was generated by investment in R&D.

- Growth of total demand - following the sharp decrease in demand in 2008-9, the

average annual growth rate was 1.83% in 2010-15; - official forecasts of investment indicate a growth rate of

3.0% in 2016; - all except Greece, Hungary and Slovenia will show a

positive growth 2016, and for one-half of the remainder at rate in 2016 above the average annual rate for 2010-5.

- Fees - fees averaged 9.8% of the investment requiring services for

the period 2008-12; - Non-market public sector (mainly government) demand

- varied greatly in some countries during the 2009 financial crisis;

- regained a steady level with some growth, but at a 2015 level that was lower than the pre-crisis 2008 level in one-half of the EU28 countries;

- Market-sector public corporations - are responsible in some countries for up to 55% of the

demand generated by public investment.

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1. Introduction The main aim of the FIDIC-EFCA Consulting Engineering Industry Survey is to forecast the total demand for consulting engineering (CE) services.

Fig. 1 - The total market and non-market demand for consulting engineering (CE) services is estimated from the investment (Gross Fixed Capital Formation - GFCF) requiring design. The demand arises from public and private investment in the market and non-market sectors in the private and public sectors. The demand is met by public and private providers in both the market and non-market sectors. Non-market in-house investment for CE services is by industries other than the CE industry. The GFCF and demand estimates are 2016 forecasts.

Fig. 2 - The FIDIC-EFCA survey benchmarks the demand for CE services arising from investment to the supply of CE services. National accounts distinguish, on the left-hand side, market-sector capital formation (investment) and consumption. Parts of the investment in construction and industrial (plant and intellectual property) assets require CE services. The parts of the consumption (for the maintenance of construction assets, for example) that also


require these services are added. On the supply side, the survey identifies those parts of the various “products” recorded in national accounts’ Supply-Use Tables that correspond to CE services. At a second step, non-market investment is added to the investment requiring CE services.

The survey uses investment data supplied by national statistics agencies since investment is forecast up to one year in advance by most agencies. As illustrated in Fig. 2, the market demand for CE services generated by investment (left-hand side of the figure) is benchmarked to the actual market supply of CE services using Supply-Use Tables (SUTs). These tables by themselves are unable to provide forecasts since they are generally three years late before being finalised. The standard measure of investment is Gross Fixed Capital Formation (GFCF) that represents (gross) changes in the capital stock, as opposed to investment in economic terms that represents expenditure (e.g., includes purchasing second-hand machinery) for which the quality of data varies considerably. For consulting engineering services, it is reasonable to use GFCF because most of the services relate to new-build construction and plant and to major renovation that prolongs the capital life of an asset. Both of these components are captured by national accounts. 1.1. Countries

This preliminary note covers in detail all 28 EU economies. For these countries, ESA 2010 accounts are not available for Poland and the breakdown of GFCF between the various economic activities (e.g., education, health, energy) are not available for Belgium, Croatia, Estonia, Lithuania, and Romania. In these case averages for the remaining countries are used.

Fig. 3 - Data quality. The 28 EU Member States are ranked by their GDP in 2010. Detailed breakdowns of GFCF between economic activities are not available for the countries indicated in purple.

Fig.4 - The GFCF for construction, plant and intellectual products (IP) for the market sector for the 28 EU countries (ESA95 national accounts up to 2010; ESA2010 national accounts from 2010, with software and ICT removed) and for government GFCF (see text). The government investment is the sum of GFCF and capital transfers.


The demand for CE services is generated by investment in construction, plant, intellectual products (IP), and own-account design. Fig. 4 shows the GFCF for construction, plant and intellectual products for the market sector taken from national accounts for the 28 EU economies. Investment in software and information and computing technology - ICT - equipment has been removed since these investments do not create a demand for CE services. Investment fell sharply in 2009-10 and has since recovered, especially since 2013. Included in Fig. 3 is the sum of government GFCF taken from Eurosat’s Government Expenditure by Function database and capital transfers from Eurostat’s Classification of the Functions of the Government database that does not provide for removal of the investment in software and ICT. While government investment in fact increased in 2009 and only started to decrease in 2010, by 2014 it was still decreasing. 1.1. Market - non-market CE services services are provided by public and private enterprises in both the market and non-market sectors and by government (supply by private non-profit organisations in the non-market sector is small and can be ignored). Fig. 5 illustrates how Eurostat distinguishes enterprises in the various institutional (public - private) and market - non-market sectors.

Fig 5 - The System of National Accounts (SNA) groups enterprises according to control (private, public) and market criteria (market, non-market).

Notes - General government: public non-market services for individual or collective consumption

provided by institutional units called Public Sector Units (PSU) that are controlled by government (government can determine the general policy).

- Public corporations: market PSU providing services that meet market criteria. Often called government sponsored enterprises, state-owned enterprises, etc, they tend to be traditionally associated with public infrastructure investment, e.g., rail and power investment.

- Non-Profit Institutions Serving Households (NPISH): generally private, non-market providers for households (e.g., churches, societies, clubs, trade unions, political parties) but can be both public non-market and private market producers, such as certain educational institutions. Most NPISH are non-market NPISH and are usually combined with non-market PSUs in general government.

Non-market and market producers are classified on the basis of “market test” criteria: consumers are free to choose on the basis of the prices charged. Prices are economically significant and, depending upon the economic activity, in some way relate to revenue covering more than 50% of production costs to reflect the provider’s need to maximise profit, a user’s need to maximise utility, and the availability of efficient markets. Most economic activities involve both market and non-market production by both the public and private sectors. Aside from saying that some activities are market or non-market dominated, there is


very little detailed information available about the market/non-market and institutional sector splits for each economic activity. It is noted that the USA and Canada keep public market sector activities (by market PSUs) as separate industries and not spread across several economic activities (e.g., the US postal system is not in the transportation sector). So unlike Eurostat, their national accounts covering the market sector do not include public corporations. For the private market sector, enterprises are normally classified as belonging to the consulting engineering industry if more than one-half of their turnover derives from architecture and engineering services that are captured by the SNA (System of National Account) M71 CPA (Classification of Products by Category) category. There are relatively few market enterprises in the public sector (normally called state-owned, -controlled or -sponsored enterprises, or simply public corporations) that have marketed CE services as their principle product. As illustrated in Fig. 1, market-sector CE services are also provided as a secondary product or as in-house production by private and public enterprises in other areas of economic activity outside consulting engineering. 1.2. Public - private EFCA noted in a recent statement that the public sector (mainly public corporations in the market sector) can, in the absence of appropriate controls, undermine the private market sector by:

- bypassing public procurement provisions (e.g., through exclusive rights and exemptions, both in-house and public sector to public sector);

- benefiting from unfair competitive advantages (e.g., enjoying a superior financial position since insolvency and bankruptcy are not factors).

If the demand for CE services arising from public investment is small compared to the total demand for CE services it is unlikely that possible public sector advantages will seriously undermine the consulting engineering sector. The survey therefore:

- splits the total demand between the public and private sectors and between the market and non-market sectors to gauge the competition arising from public corporations;

- forecasts the total demand (market and non-market) and the nature of this demand to signal the CE industry’s anticipated business environment.

1.3. Approach Using national accounts, the survey estimates the market demand by determining the investment requiring CE services. The demand arising from the investment is then benchmarked against the supply taken from national accounts’ Supply-Use Tables to establish fees (i.e., the percentage of the investment that is spent on CE services). This gives the market demand for CE services. The market and non-market demand that is not included in national accounts is estimated by identifying investment that generates a demand for CE services. The demand of CE services for this unaccounted investment is estimated using the benchmarks established for the market demand.


Summing the demand for national accounts’ investment and for unaccounted investment gives the total demand. 1.4. Revenue Forecasting the revenues for each of the three types of market providers in both the private and public sectors (CE industry, other suppliers, in-house) is a challenging task requiring industry surveys across several industry sectors. A 2010 survey of FIDIC and EFCA member associations indicated the following turnover shares for CE services supplied by both private and public market providers:

- CE industry (primary CE services market providers): 60% - Other industry market providers of CE services: 20% - Other industry market providers’ in-house production: 20%

Missing was the turnover and in-house production by non-market public providers (mainly those classified in national accounts as government Public Service Units). The 2016 survey update and this background note do not consider revenue. 2. Market demand from national accounts 2.1. Overall investment As noted above, the demand for CE services arises from investments in construction assets (primarily buildings and infrastructure) and from industrial investments comprising investments in plant and intellectual property (IP). The primary source of statistical information covering these investments are the national accounts. European Union Member States have recently converted their national accounts from the System of National Accounts SNA95-compatible ESA95 (European System of Accounts) to the new SNA08-compatible ESA2010 system. These accounts are consolidated and published by Eurostat. A reasonable proxy for investment is Gross Fixed Capital Formation (GFCF). Where GFCF data is missing the Consumption of Fixed Capital can be used provided an adjustment if made for the fact that CFC tends to lag behind GFCF. The market GFCF’s for construction, plant and IP have been shown in Fig. 4 for ESA95 national accounts up to 2010 and for ESA2010 national accounts from 2010 (unless indicated otherwise, all data reported in this preliminary note are taken from the Eurostat database and refer to the 28 EU economies). Software and ICT investment has been removed since it does not create a demand for CE services. Fig. 4 shows that the market GFCF from national accounts for construction, plant and IP decreased to a minimum in 2010. The introduction of ESA2010 around 2010 generally gave step changes in:

- plant GFCF largely owing to the capitalisation of defence systems; - construction GFCF largely owing to the incorporation of elements of the non-observed or

“black” economy; - IP GFCF largely owing to the capitalisation of R&D as an intangible asset.

Total market nominal GFCF in current prices for the 28 countries for construction, plant and IP without the removal of ICT and software was 2654 bEUR in 2008, decreasing to the ESA95 figure


of 2294 bEUR in 2010 (2536 bEUR for ESA2010) and then increasing more-or less steadily until 2016 to 2895 bEUR. 2.2. Investment requiring consulting engineering services As noted above, the FIDIC-EFCA survey combines IP investment with plant investment to give industrial investment as opposed to construction investment. 2.2.1. Construction investment The main consideration in estimating the construction investment requiring CE services is to add in repair and maintenance that is not capitalised in national accounts. The survey uses an approach pioneered by the European Investment Bank (EIB), with an adjustment to include construction investment in sector infrastructure. While the approach has failings (infrastructure investment is overestimated since the measure includes all fixed capital formation, not just the creation of infrastructure assets; the transport sector also includes storage and telecom networks) it is sufficient for the purposes at hand. Without entering into details, construction GFCF in four sectors of economic activity that mainly comprise investments in infrastructure (education, health, transport, and utilities), with a correction for construction investment in each of the four sectors, are used to separate out infrastructure in the “Other buildings and structures” component of construction GFCF. The buildings component is then added to the “Dwellings” component of construction GFCF. The amount of maintenance and renovation (M&R) for each of the four sectors and for dwellings are then estimated. It is assumed that health and education infrastructure have the same R&M demand as dwellings (this been calculated elsewhere). Dwellings R&M spending is typically in the range of 20-50% of new build investment in the various EU countries. The R&M spending for transport is given by transportation investment data reported by the OECD and that for utilities is taken from US government surveys (it is assumed to be equal to 55% of new build investment in all of the 20 EU countries).

Fig. 6 - Market-sector GFCF requiring CE services for construction (including R&M), plant, IP and own-account design as inferred from national accounts (ESA95 up to 2010; ESA2010 from 2010) for the 20 countries. Investment in ICT and software has been removed. The investment in own-account design is calculated separately (see below) and is not given by national accounts.

The end result is the construction GFCF requiring services that is inferred from national accounts (Fig. 6). As expected, the ESA95 and ESA2010 data show a step increase in 2010 and a profile that reflects the construction GFCF (Fig. 3) but at a significantly higher level (some 2000 bEUR as opposed to 1300 bEUR for new-build construction without repair and maintenance).


2.2.2. Industrial investment While industrial investment requiring CE services is only about 25% of the equivalent investment for construction, as discussed in the next section, fee levels for industrial activity are significantly higher than for construction activity so industrial activity is an important component of the demand for CE services. Estimating the national accounts’ industrial GFCF requiring CE services comes in two parts. For the plant component, capital investment data from the OECD fixed assets by activity and by asset database is used to estimate the percentage of plant GFCF requiring CE services (it averages 65% in the EU). For the IP component, the main issue is to establish how much of the large GFCF attributed in ESA2010 to R&D generates a demand for CE services. The approach taken is to use Eurostat GFCF data to estimate the GFCF for R&D that would have appeared in ESA95-based accounts if R&D had been capitalised. This gives a ESA2010 value for IP GFCF for the entire survey period (2008 to 2016). Is is noted that some countries have not yet incorporated R&D in their nominally ESA2010 national accounts. In these cases the inferred R&D GFCF is close to zero. It is then assumed that the percentage of this GFCF that requires CE services is given by the contribution to total GFCF given by the M72 R&D product in Supply-Use Tables (the average is equivalent to 55% of total GFCF for the EU28). In estimating plant GFCF, ICT equipment and software GFCF that does not concern CE services are removed. This is done by a) removing from ESA2010 accounts the ICT equipment GFCF (all software GFCF is moved from plant to IP in ESA2010 accounts) and removing an equivalent amount from ESA95 accounts; b) removing IP software from ESA95 IP GFCF and removing an equivalent amount from ESA10 IP GFCF. In some case where national accounts’ data was not available, we used the OECD breakdown of ICT GFCF. Defence systems’ GFCF that is capitalised in ESA2010 but not in ESA95 is given by the difference between the ESA95 Other Equipment GFCF and the ESA2010 Other Equipment plus ICT GFCF. This difference is added to the ESA 95 plant GFCF. The plant and IP GFCF from national accounts for industrial investment requiring CE services are given in Fig. 6. Both are fairly constant at levels of some 480 and 300 bEUR, respectively. It is interesting to note that with the capitalisation of R&D in ESA2010 national accounts, R&D becomes in the eyes of public authorities almost as important as investment in plant insofar as the consulting engineering industry is concerned. Any industry survey must therefore now account for what happens to the potentially large demand arising from investment in IP. 2.2.3. Demand Given the amount of investment requiring CE services, the next step is to determine the percentage of the investment that is spent in CE fees. This percentage represents the potential demand for CE services. The FIDIC-EFCA Survey assumes that:


- fees for industrial investment are higher than those for construction investment but never exceed 15% of the investment;

- the demand from national accounts’ GFCF must equal the supply in purchasers’ prices given by national accounts’ Supply-Use Tables;

- all construction investment requires CE services but only a percentage of industrial investment requires these services (typically some 64% of the plant component of industrial investment and a much smaller percentage of the IP component).

The supply of CE services is estimated from Supply-Use Table (SUTs) by calculating appropriate percentages of four products. This involves removing the following products classified according to Eurostat’s NACE (Nomenclature generale des Activites economiques dans les Communautes europeennes) Revision 2:

- M71 (Architectural and engineering activities; Technical testing and analysis) that involve technical testing and analysis;

- M72 (Research and Development) that do not relate to engineering; - B09 (Mining support ) that do not relate to test drilling; - M74 (Industrial design in connection with specialised design) that are not the special

design and advanced technical products supplied by the CE industry. - M80-82 (Security and investigation, service and landscape, office administrative and

support activities) services that do not involve landscape-related activities. The required percentages are obtained by scaling the total supply of a given product from SUTs using turnover data from Eurostat’s Structural Business Statistics (SBS) database and other sources. As an example, the supply of M71 products at purchasers’ prices from a SUT is multiplied by the percentage of turnover for M71.1 (Architectural and engineering activities) in the SBS turnover data for the M71 (Architectural and engineering activities; Technical testing and analysis) industry sector. It is important to note that to avoid double counting, the supply of product used by the economic activity primarily responsible for the product is deducted from the total supply. For example, in the case of the M71 product, the M71 product in the Use Table that is used by the M71 activity itself is removed. The most difficult adjustment relates to R&D. Here the M72 product less the M72 product used by the M72 industry itself is reduced in proportion to:

- the turnover of the M72.19 (Other research and experimental development on natural sciences and engineering) product;

- the R&D expenditure by the business sector as a percentage of all sectors (from the OECD Gross Domestic Expenditures on R&D - GERD - database);

- the turnover for research in industries involving engineering (7 industry sectors in the OECD STAN R&D Expenditures in Industry database). R&D for motor vehicles, trailers and semi-trailers (Code D29) dominates in many cases so a part of the expenditure that is for fundamental research and for commercialisation is removed using data for the number of calls for R&D proposals published by EAGAR

It is to be noted that:

- the “Frascati Manual” used to classify R&D expenditures allocates all expenditure to an industrial activity’s primary product category. This means that secondary R&D is excluded and R&D supply is underestimated.


- public corporations tend to classify R&D under services. This is not an issue for the FIDIC-EFCA survey since investment in industrial services and R&D are assumed to generate the same demand for CE services.

- own-account R&D (unlike own-account design – see below) is included in ESA2010 national accounts and unlike in-house design does not need to be added.

The result of various adjustments is the supply of CE services for the periods covered by Eurostat’s Supply-Use Tables. Examples are illustrated in Fig. 7. In most cases the supply over the survey period is continuous across the ESA95 and ES2010 data. In some cases there is a discontinuity between ESA95 and ESA2010 data which is hardly surprising given the large number of adjustments that are made to extract the CE services supply. The ESA95-based SUTs also require many more ad hoc adjustments than for the ESA2010 equivalents since little was known about R&D and weapon systems when the ESA95 data was compiled.

Fig. 7 - Examples of charts showing the supply (in blue) of consulting engineering services calculated from ESA95 and ESA2010 Supply-Use Tables. The market demand from investment is benchmarked by best-fitting (see text below) the demand (in red) to the supply.


It is perhaps remarkable that the two sets of supply estimates correspond reasonably well, even in the worst cases. There are however some notable exceptions which fortunately appear not to discredit the survey methodology. In particular:

- Italy shows in Fig.7 a large step change in supply following the change-over to ESA2010. This has not been remarked upon by Italy’s statistics agency but presumably stems from the incorporation of previously unreported construction product;

- Sweden shows an abnormally large decrease in supply (primarily for the adjusted M71 supply) in 2008 just before the introduction of ESA2010. It is believed that this relates to the way Sweden classifies construction activity and products, a feature that also leads to an unusually high fee level (see below).

2.2.4. Benchmarking Given the demand from investment requiring CE services and the actual supply of CE services (both obtained from national accounts) the final step is to adjust the fees for construction and industrial investment so that the two sets of curves correspond. For the best fitting it is noted that a bit fit for a given year corresponds to the supply of services (S) being as follows:

S = FcGc + xFc*(Gc + Gp) where Fc is the fee for construction investment, x is the ratio of the fee for industrial investment to the fee for construction investment, and G is the investment (GFCF) requiring services for construction investments and for plant and IP investments. This equation is a reciprocal growth law equation. An analysis of the plots of residuals for a reciprocal growth law fitted to the supply for each year gave the optimal values for fee ratio x for each country. These values are plotted in Fig.8. They were obtained by making the following reasonable assumptions:

- fees for industrial investment (i.e., the percentage of GFCF that is spent on CE services) are always more than those for construction investments;

- the construction and industrial fees never exceeded 15%; - the fee ratio x was less than 2.

Fig. 8 - The fee ratio x, namely the ratio of the fees for industrial and construction investment, for 2010.

For countries with very few data points or incomplete data sets the ratio was set equal to the average value of 1.2.


The fee ratio varied between 1.2 and 1.5 (the fee ratio for Sweden is unusually low, reflecting the unusually high fee levels). There is no obvious correlation between the construction fee and the fee ratio, which is to be expected because each county has its own fee structure for CE services generated by industrial investment. 2.2.5. Fees Fig.9 summaries fees (expressed as a percentage of the investment) for the reference year 2010 that were estimated by best fitting the market demand to the supply:

- the fee for services arising from industrial investment (plant and IP investment); - the fee for services arising from construction investment; - the average fee.

Fig.9- Fees for CE services in 2010 generated by construction and industry investment benchmarked to the supply of the services from Supply-Use Tables. From top to bottom: a) average fee (average: 9.6%); b) construction fee (average: 8.9%).

It can be seen that the average fee for CE services varies significantly across the 20 counties, with fees for construction investment of less than 6% in some countries, increasing to over 12% elsewhere. This is a cause for concern in those countries that seem to have systemically low fees. The construction fee for Sweden appears to be abnormally high, a feature that possibly relates to a classification issue discussed earlier. Croatia is characterised by the availability of very little data, which explains the unusually high fee. 2.2.6. Fee variation The charts in Fig. 7 showing examples of the demand for CE services arising from investment (reported in national accounts) requiring these services fitted to the supply of these services


calculated from ESA95 and ESA2010 Supply-Use Tables assumed that the fee ratio remained constant. This was reasonable because the average construction fee for the 28 countries (9.8% in 2010) varied very little (between 9.5% and 10.5%) throughout the period for which SUT’s are available (generally 2008-12). In general, there was too little data available to allow any significant variation with time of fees to be examined in detail. Only two countries (Czech Republic and the UK) have provided SUTs for more than four years. The fee ratio x for these two countries obtained by fitting the reciprocal growth law equation are plotted in Fig. 10. The increasing and decreasing construction fee for the two countries shown in the figure have a fairly strong correlation (>0.8) suggesting that a change in the construction fee is a significant factor in the two countries.

Fig.10 - The fee ratio for several years obtained by fitting supply to demand for the UK (left) and the Czech Republic (right).

This tentative conclusion will require Supply-Use Tables for several more years before it can be confirmed. In the meantime, it is necessary to assume that the construction fee and the fee ratio remain constant. 2.2.7. Market demand Using the construction and industrial fee it is a simple matter to calculate the market demand (Fig. 11) and the demand shares (Fig. 12 and 13) for CE services arising from construction investment and the plant and IP (mainly R&D) components of industrial investment.

Fig.11 - The market demand in the 28 EU countries for CE services arising from investment in construction, plant, IP (mainly R&D). The data are for ESA95 national accounts in 2008-9 and for ESA2010 in 2010-15.


Fig. 12 - The shares in 2012 of the market demand for CE services in the 28 EU countries arising from investment in construction, plant and IP investment.

Fig. 13 - The shares of the market demand for CE services in the 28 EU countries arising from investment in construction, plant and IP investment.

The market demand for each EU28 country in 2015 is given in Fig. 14.

Fig. 14 - The market demand in 2015 for CE services in each 28 EU country generated by investment in construction, plant and IP investment.

Overall, since 2008 the shares of the market demand in the EU28 arising from construction and plant investment has decreased whereas the share of the demand arising from IP investment (mainly R&D) has increased significantly. 3. Demand for investment not included in national accounts 3.1. Own-account design 3.1.1. Market private sector own-account design As regards CE services, the main component of market demand that is not included in national accounts is own-account design by economic activities other that the activity undertaking the design.


National accounts already include some investment in new design, which includes new processes and systems. For example, architectural and engineering services can be capitalised when these costs are embedded into the acquisition of a recognised asset. However, there there is some confusion as to how much design spending is capitalised, at least for ESA2010 accounts since while SNA 2008 does not specifically endorse capitalising “Other Intellectual Property Products: Architectural and engineering designs”, it notes “Other intellectual property products include any such products that constitute fixed assets but are not captured in one of the specific items above”. In general however, it is understood that own-account design by all the various types of private and public enterprises producing both in-house and marketed CE services is not capitalised. The EU INTAN project database gives the GFCF for new architecture and engineering design (AED) which includes general design (by graphic, product and clothing designers) but excludes software design. It does this using Supply Tables (and other data) for the M71 product. Strictly speaking we need the investment in own-account design of all types that gives rise to a demand that can by satisfied be consulting engineers. There is clearly some design similar to AED that is not included in M71 but the amount is small in the case of the types of design that are carried out by consulting engineers in both construction and industry. The survey of the UK on which the INTAN’s “own-account software” method to estimate AED GFCF is based used labour force data showing that design and development engineers and architects performing CE services represent 62% of the design labour force. The method is industry specific but not product specific, so one needs to assume that the share of each institutional sector is the same across all products (although different in each industry). Nonetheless, the method gives a reasonable estimate of the amount of own-account design GFCF (plotted in Fig. 4) that creates a demand for CE services. The INTAN estimates were further reduced by assuming that CE services were only generated by investment in the agriculture and fishing, mining, manufacturing, and construction sectors. 3.1.2. Non-market public sector own-account design Also not recorded in national accounts is the own-account investment in design by the non-market public sector (the top left quadrant of the vertical line in Fig. 5 comprising “public” NPISH and general government PSU). Following EU SPINTAN project, the public non-market demand for CE services arises from intangible investments in design, R&D and mineral exploitation. CE services for all three are the same in the market and non-market sectors, notably design which for CE services involves AED deriving from construction investment.. This is not the case for other types of services related to construction investment since the service may derive from a value (e.g., the artistic and cultural value of a museum) unrelated to the construction cost. The demand for CE services arising from mineral exploitation and R&D GFCF in the market sector is already small: the non-market public sector own-account demand arising from mineral exploitation and R&D can therefore be ignored. For design, the very limited available data available from SPINTAN indicates that for 1995-2013 in the USA, where public corporations are not included in the market sector, market own-account design amounted to 0.66% of GDP as opposed to non-market own-account design of only 0.18% of


GDP, i.e., non-market own-account design is about 25% of market own-account design. We use this percentage for the EU countries together with the benchmarks from the market own-account design to estimate the amount of general government own-account design. 3.2. Public sector non-market demand As discussed above, the public sector comprises:

- non-market: general government which includes non-market PSU in national accounts and COFOG data and non-market NPISH;

- market: public corporations. Investment by non-market NPISH leading to a demand for CE services is small and can be ignored.

COFOG function National Accounts economic activity

Providers Public non-market: - general government - PSU

Public and private market: - private enterprises - public corporations

GFCF All asset types Construction, plant, IP Transport Transport

Communication Transport Communication Storage

Health Health Health Social services

Education Education Education Utilities Fuel and energy

Waste management Waste water management

Electricity Gas Water supply

Housing Dwellings Housing and community amenities Housing development Community development

Table 1 - The correspondence between national accounts’ economic activities and functions of government.

The demand for CE services arising from public non-market investment (i.e., non-market investment by general government) is estimated using the EIB approach summarised above for the investment in each of the economic activities that are dominated by infrastructure (health, education, transport, utilities, housing as in Table 1). The approach is combined with Eurostat and OECD national accounts’ data classified according to COFOG to estimate the percentage of GFCF that is funded by general government (which includes non-market PSU). One adjustment is needed in estimating the public non-market demand. It is necessary to add to the COFOG for each activity the GFCF corresponding to the construction GFCF that is attributed in national accounts to the activity.


3.3. Capital transfers Not included in national accounts is investment by general government in the form of grants and other capital transfers. There is:

- general government investment corresponding to: - grants (capital transfers to public and private entities outside the general government to

support investment in fixed assets); - loan guarantees; - tax concessions, such as those for mortgage interest, research and development (R&D),

and municipal bonds; - long-term funding at subsidised rates of the operations of public financial institutions

such as development banks; - government-backed saving schemes; - changes in public financial ownership of private companies and non-produced assets.

- market PSU (public corporation) investment by public “market operators”: - for example, when a PSU-run power enterprise receives public funds for expansion of

the electric grid, or certain universities receive public funds to build new education facilities, the investment may not appear as general government GFCF in national accounts.

We include grants and capital transfers and investments by public corporations (state-owned market operators) for general government (which includes non-market PSU) using capital transfers (Code D9) for each of the activities in Table 1 taken from the Eurostat Government Expenditure by Function database. The database is classified according to the Classification of the Functions of the Government (COFOG). The capital transfer is then split between construction, plant and IP GFCF using the national accounts CFGF for the equivalent sectors. It is noted that capital transfers’ data tends to overestimate the amounts because the data include government subsidies to private investments that are not a component of public investment. However, including investment grants in the capital transfers tends nets out the effect of the effect of capital transfers that do not entail the creation of fixed capital. The construction, plant and IP components of capital transfers are therefore added to the GFCF from national accounts. In seeking the demand for CE services for the public sector, one needs the construction, plant and IP GFCFs for the public sector. A reasonable assumption is that the public construction, plant and IP GFCFs and the adjustments to obtain the GFCF requiring CE services for each activity are the same for non-market GFCF from COFOG data as for the market GFCF from national accounts. 4. Total demand The final outcome of adding in all the investment not included in national accounts and using the benchmarked demand is the total GFCF requiring consulting engineering services (Fig. 15) and the total demand for CE services (Fig. 16). This total demand arises from investment in the market and non-market sectors by both the private and public sectors.


Fig. 15 – Total (market and non-market) GFCF requiring CE services for construction (including R&M), plant, IP and own-account design as inferred from national accounts (ESA95 up to 2010; ESA2010 from 2010) for the 20 countries. Investment in ICT and software has been removed. The investment in own-account design is calculated separately (see below) and is not given by national accounts.

Fig. 16 - The total demand (market and non-market, public

and private sectors) in the 20 EU countries for CE services arising from investment in construction, plant, IP (mainly R&D), and own-account design. The data

are for ESA95 national accounts in 2008-9 and for ESA2010 in 2010-15. was small.

The total demand arising from construction, plant and IP investment in the 28 EU countries (Fig. 16) shows that demand dropped sharply in 2009 reaching a minimum in 2009 before growing more-or-less continuously except for a small decrease in 2013. The total demand for each EU28 country in 2015 is given in Fig. 17.

Fig. 17 - The total demand in 2015 for CE services in each 28 EU country arising from investment in construction, plant and IP investment.


4.1. Total demand shares

Fig. 18 - The shares in 2012 of the total demand for CE services in the 28 EU countries arising from investment in construction, plant, IP, and own-account design investment..

Fig. 19 - The shares of the total demand for CE services in the 28 EU countries arising from investment in construction, plant, IP, and own-account design investment.

Fig. 19 shows that the shares of the total demand for construction and plant related investment decreased over the 2008-15 period while there was a significant increase in the share of demand generated by R&D investment. The demand shares in 2012 shown in Fig. 18 and 19 indicate that:

- IP demand (mainly arising from R&D investment) is significantly smaller (12% of total demand) than the 2012 survey estimate of 16% of market demand for all 28 EU countries in 2009. This is to be expected because the 2012 estimate for the demand arising from R&D investment was based on very limited data that clearly led to the demand being overestimated.

- Own-account design demand is reduced significantly (6% of the total demand) compared to the 2009 estimate of 16.4% of market demand for all 28 EU countries in 2009. During the intervening period, authorities and national statistics agencies have consistently and repeatedly reduced own-account design estimates downwards and clarified the status of own-account design.

The percentage (63% ) for construction in the total demand for the 28 EU countries is close to the 2012 estimate of 67% of market demand for all 28 EU countries in 2009. The same is the case for plant demand (19% as opposed to 16% of market demand). Close to one-half of the own account design will be for construction-related investments, so some 66% of the total demand is for construction-related investment.


The share of the total demand in 2012 generated by construction related investment (Fig. 20) varied between 40 and 75%, with an average of 62%.

Fig. 20 - The share of the total demand in 2012 generated by construction related investment (varied between 40 and 75%, with an average of 62%.

4.2. Growth in total demand

Fig. 21 - The annual growth rate in the total demand for CE services for the period 2010-15.

The total demand (market and non-market) in the EU28 grew by 1.83% each year during the period 2018-15. Country-by-country annual growth rates in the total demand for 2010-15 are plotted in Fig. 21. It is noted that several countries had no growth over the period. Only Estonia, Latvia, Lithuania, Slovakia, Sweden, and the UK experienced growth rates above 5% per annum for the total demand. 5. Public demand 5.1. Non-market public demand The share in 2014 of the total demand for CE services arising from investment by the non-market public sector (essentially only investment by government in the public sector – the top-left of Fig. 4) are plotted in Fig. 22.

Fig. 22 - The share in 2014 of non-market public sector demand in the total demand for the EU28 countries.

It is noted that the non-market (mainly public) demand remains significant in many countries and indeed is more than 5% of total demand in all 28 countries, with an average of 11.4% (see Fig. 22). The change in the demand for CE services arising from investment in the public sector (essentially only investment by government in the public sector – the top-left of Fig. 4) are plotted in Fig. 23.


Fig. 23 - The percentage of non-market (as a percentage of total demand) generated by public sector (mainly by government) investment.

As shown in Fig. 23, there were significant fluctuations in the non-market demand in many countries during the financial crisis in 2009 (presumably because government continued to invest while the private sector decreased investment). By 2014, most countries had regained a steady-state, although the level relative to the pre-crisis 2008 level had increased for some (e.g., Denmark) and decreased for others (e.g., Ireland).

Fig. 24 - The percentage of non-market (as a percentage of total demand) generated from public sector investment.

Fig. 24 plotting the change in the non-market public demand over the period 2008-14 shows that 14 countries (red bars in the figure) experienced a decrease in the demand, and only 12 showed an increase (green bars in the figure). Not shown are Croatia and Cyprus owing to limited data. The increase was generally modest and only Greece, Hungary and Romania showed increases greater than 5% over the period. 5.2. Market public demand by public corporations GFCF and related measures are not available by institutional sector so we cannot estimate the demand arising from the public market sector (i.e., public corporations). The best that can be done is to use various estimates of public corporation GFCF to split the market demand between the private and public sectors. The public market demand is then added to the public non-market demand to obtain the public demand.


Public corporation GFCF and proxies such as fixed capital and capital formation are rarely reported; they vary considerably between countries. However, it is often possible to infer public corporation GFCF from capital expenditure taken from company accounts. Seven countries have been examined to date. Fig. 25 plots the percentage of the public sector demand, as a function of the public sector demand, that arises from investment by public corporations.

Fig. 25 - The share of the demand for CE services arising from public investment that originates in market-sector public corporations. There are two data points for France to indicate that there can be large differences in official estimates of investment by public corporations. Data for all 20 countries to be completed.

It is relevant to note that in some countries investment by public corporations gives rise to over 50% of the demand for CE services that arises from public investment. At this preliminary stage there does not seem to be an obvious pattern to the share of the public demand that is generated by public corporations. This is not surprising, and indeed considerable caution is required in interpreting results, since there is likely to be dispersion reflecting statistical differences related to the institutional set-up for providing infrastructure and public services. For instance, an infrastructure facility or a public service may be financed and provided by a public corporation in one country (thus showing up as private investment in national accounts), while in another country it is financed by local government budgets (thus showing up as public investment). There may possibly be a correlation with the public capital stock per capita which varies by some 50% across the EU. 6. Forecasts The final issue concerns the forecasts for 2016. It is straightforward to apply 2015 parameters to official forecasts of GFCF and GDP to give the demand for CE services in 2016.

Fig. 26 - Forecast growth in the total demand for CE services in 2016 plotted as a function of the annual growth rate for 2010-15.


The forecast increase in the total demand for consulting engineering services in 2016 is plotted in Fig. 26 as a function of the annual growth rate for 2010-15. Of the 28 EU countries, all except Hungary, Greece and Slovenia and are forecast to have positive growth in 2016. Half of the countries with positive growth are forecast to have a growth rate in 2016 that is greater than the historic rate for 2010-15. Information It is planned to complete forecasts for the remaining 8 EU Member States and the analysis of public corporation investment and of intra- and extra-EU imports and exports in June 2016. Report prepared by Peter Boswell, Bricad Associates, Switzerland. Copyright 2016: Bricad Associates Website: survey.peterboswell.net via bricad.online Released 22 July 2016

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