Welcome in the strange world of Building and Construction

Today, there were two news items concerning the strange world of Building and Construction. Both news items were shocking in their own right.

Default Fraud or ‘a means to an end’?!

2012 has turned into a very bad year for the whole Building and Construction (B&C) industry: 

Many building projects for Residential and Commercial Real Estate have been withdrawn, due to a total lack in demand from potential buyers and the mounting difficulties among project developers to finance new building projects.

A second cause is that even the most backward communities and cities are nowadays wondering whether it is wise to continue building new residential areas, commercial buildings and industrial zones like there is no tomorrow. 

Many cities and communities are still filled to the brim with building ground, but there are no buyers to take their bait (see the second part of this article). 

Both  circumstances turn 2012 into an annus horribilis (i.e. horrible year) for communities, project developers and building companies. Although there is still some work to be done for infrastructure (waterways, railroads, highways and other infrastructural projects) and special projects, like football stadiums and concert halls, it is nowhere near enough to keep all building companies alive with their current amount of personnel.

What makes life difficult for the B&C companies in The Netherlands is that it is quite hard to lay off people, unless a company can make clear that it is on the brink of defaulting if nothing happens with the worker base.

Worker and dismissal protection are still at a high level in The Netherlands. Although there have been very good and justified reasons for maintaining our level of dismissal protection in The Netherlands, it might force companies to take desperate measures to keep their head above water.

Building and Construction companies may have discovered a new ‘trick’ to lay off their excess personnel: they file for bankruptcy for (parts of) the company, enabling them to lay off all their workers in that part of the company. Afterwards they make a second beginning with the company (part) and re-engage (some of) their former workers using a so-called ZZP-contract (Freelancer / Independent worker without personnel).

This is much cheaper for the company that can finish its projects and meet its contractual obligations, but doesn’t have the hassle with excess personnel. The workers, however, lose their job and their fixed income and enter an uncertain future as freelancers for the company, knowing that their assignment might end when their projects are finished.

The question is: is this default fraud or a means to an end to survive with one's company?!

The Dutch newspaper Algemeen Dagblad (www.ad.nl) writes on this story:

Builders ditch personnel through ‘unfair defaults’

More and more building companies file for bankruptcy in order to ditch their fixed personnel. After such a bankruptcy, these companies quite often have a second beginning with freelancers (zzp), which enables them to work much cheaper.

On top of that: as a consequence of this construct, defaulted building companies don’t have to pay dismissal fees to their workers, where they should pay such fees normally. According to the labor union for the B&C industry ‘FNV Bouw’, these unfair defaults ‘ are how its goes here in this industry’.

“Building companies are in dire straits nowadays. Competition is killing. Employers only want one thing and that is to rent personnel at the lowest possible price”, according to FNV Bouw managing director Wilco Veldhorst..

By hiring a freelancer employers save on their personnel expenses. Besides that, it is quite easy to get rid of excess workers when their project is finished.

Employers in this industry, gathered in Bouwend Nederland (i.e. ‘Building Holland’ ), state ‘they don’t recognize themselves in these kinds of abuse. According to the organization, ‘this is not a widespread phenomena’ and ‘it is a way of working that we certainly don’t endorse as employers’.

Before I give my opinion on this news item, first I want to state this: the labor unions in The Netherlands are in dire straits themselves. With dropping numbers of members, the new pension and retirement plan disaster that backfired enormously at the largest federation of unions 'FNV' and the internal cat fights within the FNV ‘mothership’ on the question who is ultimately in charge within the union, the union could use some positive attention to show it's still alive and kicking.

Therefore this news ‘might’ be a virtually non-existent problem that has been blown up to substantial proportions. On the other hand, I tend to rather believe the union in this situation than Bouwend Nederland that states that everything is hunky dory within the industry.

Although I can understand that some building companies would deploy these kinds of desperate measures and sometimes are even forced to do so, I do not approve of it. It would not be correct to call it ‘default fraud’, but it comes darn close!

Workers that already go through a difficult situation with lots of uncertainty as a consequence of the continuing crisis, must either ‘earn’ their own job again, while entering into a very unsecure ZZP-contract or they are fired: straight into Unemployment Benefit without any dismissal fees. Especially workers that have worked long years for such a company feel betrayed by this treatment. 

Especially in this economic situation, it should be more easy for companies to lay off excess personnel, when they can show that the company needs it to survive eventually. However, this personnel should be entitled to either outplacement services delivered by the company or a fair dismissal fee. 

Unfortunately it happens much more often that excess personnel is ditched through defaults of company parts. Especially the Dutch BV (private limited) is a very suitable legal form for this kind of personnel reduction. Personnel can be moved internally from one limited to another limited within the holding. When this so-called personnel limited defaults, the rest of the holding company (operations limited + management limited) can continue their operations without any problems whatsoever.

That this kind of operation skims over the edge of legality is obvious, but it happens. That is very unfortunate for the workers that work at such a company.

Cities that took ‘a bigger bite of building ground than they could chew’, now start to pay the price for it.

In the past I wrote several times on the ‘kamikaze tactics’ of cities and communities concerning the purchase of building ground for new residential areas and commercial/industrial zones.

Yesterday, the Dutch news magazine Nieuwsuur (www.nieuwsuur.nl) presented data on the financial losses that communities and cities suffered as a consequence of excess ground purchases in the past. Read, shiver and hold your pants:

Communities lose millions on building ground

Many Dutch communities lost millions of euro’s on building ground they purchased in the past. This became clear from a Nieuwsuur investigation among 40 communities. These losses force substantial austerity measures in these communities.

From the fourty communities, with among those the thirty largest in The Netherlands, 33 suffered a loss in excess of €1 mln. Eleven communities suffered a loss in excess of €20 mln. The five communities with the largest losses were:

Kaag and Braassem	-/- €46 mln
Groningen	-/- €63 mln
Den Haag	-/- €64.8 mln
Heerenveen	-/- €79.5 mln
Apeldoorn	-/- €124 mln

At the beginning of this year, it became clear that the community of Apeldoorn took a large risk by purchasing vast amounts of building ground. That ground turned out to be unsaleable. The investigation proves that more communities suffer from the same problem.

According to Erwin van der Krabben, professor  with a chair in Real Estate, it are enormous losses that the communities had to take. “Most communities have no flesh left at their bones. They ran out of any reserves. This means: closing swimming pools and libraries and making an end to subsidies for sporting clubs and local welfare associations.

The end to the financial misery is not in sight yet, according to Van der Krabben: ”Most communities reckon that the Dutch housing market might improve again in a few years. However, things might remain bad for the next five to ten years. This means taking additional losses”. Van der Krabben also found that many communities kick the can down the road, instead of taking losses immediately.

Alderman Lucas Vokurka(D66) from Delft thinks that the Dutch national government has to intervene:”We have large amounts of building ground. Our neighbour cities have that too. There is a large overcapacity that causes further drops in prices”. According to Vokurka, the central government should make an inventory of all building locations and ”should decide top-down what building locations should be scratched. The communities involved should be compensated by the central government”.

Alderman Vokurka is a blatant fool.  So are all the other aldermen that have been involved in the kamikaze actions concerning the purchase of building ground.

The central government should not compensate the communities that purchased excess building ground, but should put these communities under legal restraint and force austerity measures on them: especially among the parts of the civil service that are involved in building and construction. Parts of the community budget that involve necessary utilities like swimming pools and libraries should be left unharmed.

On top of that, it should be explicitely forbidden for these communities to raise municipal taxes and parking fees and to lower the degree of service to their citizens. The inhabitants of these cities should not suffer from the stupidity of their city council and civil service.

To give you an impression, I will calculate the losses per inhabitant that the communities in the aforementioned table suffered:

Kaag and Braassem	-/- €1782 per inhabitant
Groningen	-/- €327 per inhabitant
Den Haag	-/- €129 per inhabitant
Heerenveen	-/-  €1826 per inhabitant
Apeldoorn	-/- €789 per inhabitant

Heerenveen, the lovely Frisian city, is the clear loser in our ‘Pathetic Top Five’, but the other communities should also be very ashamed of themselves.

I hope that central government will be hard on these communities, but the strong and growing trend among central and local governments to tax themselves out of misery makes this a very implausible option, unfortunately.