Norwegian contractor Veidekke has decided to perform a NOK550 million (€58.03 million) write-down of the project portfolio in its Norwegian civil engineering business.
In 2017, the company implemented a major reorganisation and realignment of the strategy for its Norwegian civil engineering business due to the fact that project profitability was weak. That year, the civil engineering business accounted for 13% of Veidekke’s overall turnover and it reported a profit margin of -1.6%.
As a result, new management was introduced, project organisation was streamlined, and a greater focus was put on turnkey and other projects where Veidekke felt it was best equipped to succeed.
However, a new assessment covering about 50 civil engineering projects in Norway was said to have uncovered a need to reduce portfolio risk, resulting in the current write-down, which will be charged to the accounts for the second quarter of 2018.
The write-down is mainly attributed to three infrastructure projects – two ongoing and one completed – and a project in the energy sector, which were said to precede the reorganisation of the civil engineering business and the new strategy that was drawn up in 2017. The write-down was said to have had the effect of reducing financial risk in the company’s portfolio.
Arne Giske, president and CEO of Veidekke, said, “Although we are finding that the measures we implemented last year appear to be yielding the desired effects, it is very disappointing that we are required to write down our project portfolio in Norway.
“A key challenge has been construction contracts on infrastructure projects with major change requirements, where it has proven difficult to receive full compensation for the changes.”
The company’s Norwegian construction operations will be divided into two parts – Building Construction Norway and Civil Engineering Norway. Veidekke’s segment reporting will be split into these two segments as of the third quarter of 2018.
Veidekke is expanding its risk management programme at the project and portfolio level in all of the group’s units. The programme was said to comprise new tools, processes and methods for early risk detection in projects and for making the appropriate assessments and decisions.
In the short term, Veidekke said it would ensure sufficient management capacity on ongoing infrastructure projects and focus on their safe and profitable execution. Going forwards, the company intends to take great care when prioritising projects where risk, geography, client and contract type are significant parameters.
Giske said, “For the civil engineering business, the measures we are implementing now will ensure better control of the project portfolio. We will also conduct a thorough assessment of the business’ strategy, in addition to reviewing the cost structure throughout the group with the aim of reducing costs and creating shareholder value.”
Including the NOK550 million (€58.03 million) write-down, it has been estimated that the company’s Norwegian construction operations will report a pre-tax loss of between NOK440 million (€46.41 million) and NOK470 million (€49.57 million) for the second quarter of 2018.