Production of the Built Environment as an Industrial Sector

 Industries, clusters and sectors

Parts of the economy that involve many different contributors and participants are often called an industrial or economic sector, an example is the non-profit sector with its wide variety of organisations. Although the idea of an industrial sector has no precise meaning, it is often used to describe a loose collection of firms with one or more common characteristics, like ‘manufacturing’ or ‘the business sector’, though firms in these sectors come from many different industries.

 

The starting point is the concept of an industry, which is defined in the Standard Industrial Classification (SIC) used by national statistical agencies as a group of firms with common characteristics in products, services, production processes and logistics. These firms are classified into a four-level structure. The highest level is alphabetically coded divisions such as Agriculture, forestry and fishing (A), Manufacturing (C) and Information and communication (J). The classification is then organised into two-digit subdivisions, three-digit groups, and four-digit classes.

 

The boundaries around an industry are tightly defined by the SIC, to allow identification of individual industries as producers of goods and services and measurement of their contribution to output and employment in the economy. However, to produce something supplies are needed, purchased from other producers, and these relationships between industries are also important. For example, bricks are manufactured products supplied to property developers to provide buildings for their customers. Many industries are structured around such supply chains and production networks, and when enough firms share sufficient characteristics they are often described as an industry cluster. 

 

An industry cluster brings together a group related firms and was originally applied in the 1990s to specific locations like the wine industry in California’s Napa Valley or Bordeaux in France. Over time, the concept itself broadened as different types of clusters were identified, such as creative industry hubs or knowledge centres. Two types of industry cluster are:

 

1.     Geographical – industries using the same resources in a specific location

·       Movies – Hollywood US, Bollywood India;

·       IT – Silicon Valley CA, Silicon Alley NY, Silicon Glen Scotland, Bangalore India;

·       Leather goods, spectacles and glasses – Italy;

·       Health – Boston US, Oxford England, Chennai India;

·       Electronics – Guadalajara Mexico, Cordoba Argentina, Guangdong China;

·       Finance – London England, New York US, Geneva Switzerland; and 

 

2.     Vertical – a hub and spoke value chain from suppliers to end products

·       Automotive – Detroit US, Dusseldorf Germany, Turin Italy, Curitiba Brazil;

·       Aerospace – Toulouse France (Airbus), Seattle US (Boeing);

·       Smart phones – Guangdong China (Apple), Hanoi Vietnam (Samsung).

 

Some industries do not have central locations like the clusters in IT, wine, finance etc., or major hubs where production is concentrated like automobiles and aerospace. These industries are built around decentralised production, distribution and delivery networks that make their products widely available to clients and customers. Four examples are:

·       Pharmaceuticals – a globally distributed industry, with countries combining some form of domestic production and imported supplies;

·       Shipbuilding – brings many suppliers together in a few locations;

·       Electricity generation – brings many suppliers together in many locations;

·       Building and construction – the world’s most ubiquitous industry, sharing the most widely used materials of wood, clay, glass, steel and concrete. Is this really a cluster?

 

Building and construction, in fact, is only one of the many industries involved in the production of the built environment. There is a diverse collection of industries that create, manage and maintain the built environment. On-site work links suppliers of materials, machinery and equipment, products and components, and all other inputs required to deliver the buildings and structures that make up the built environment. Consultants provide design, engineering, cost planning and project management services. Once produced, buildings and structures then need to be managed and maintained over their life-cycle, work done by another group of related industries. The built environment also needs infrastructure and services like water and waste disposal, provided by yet more industries. 

 

A dense network of many different firms and participants such as this is often called an industrial or economic sector, because it is too diverse and distributed to be a cluster. There is no definition of an industrial sector, beyond a broad collection of firms with one or more common characteristics, like ‘manufacturing’ or ‘the business sector’, though firms in these sectors come from many different industries. There are also sectors based around a definable market, two examples being:

·       Defence - there is no defence ‘industry’ because suppliers come from many different industries like IT, aerospace and shipbuilding, but as a sector share resources and clients; and 

·       Tourism - which brings together the contributions of industries like accommodation, tour operators and entertainment. Australia has an annual Tourism Satellite Account produced each year (cofounded by industry and government). 

 

If the built environment encompasses the entirety of the human built world, then the built environment sector (BES) is the collection of industries responsible for producing, managing and maintaining the buildings and structures that humans build. To be included in the BES an Industry needs a direct physical relationship with buildings and structures. Those industries can be divided into those on the demand side and those on the supply side, like materials or specialised tradesmen, Demand side industries like property developers and facility managers pull output from the supply side, both for new output and for servicing and managing existing assets. Therefore the BES is a sector more like defence than tourism, because it also produces long-lived assets for clients outside the sector (governments and owners respectively) that require repair and maintenance, and that R&M generates significant ongoing revenue for firms across the broad industry sector that produces those assets. 

The concept of the BES is broad and extensive, so cannot be precise and exact. While the boundaries of industries and markets are important, in practice the data and SIC definitions are the starting point for the data used. The industries included are selected because they clearly have a relationship with construction, management and maintenance of the built environment. This may not capture every last contribution to the BES, but it does allow the development of a profile of the sector. Measuring the BES provides data on its relationship to the wider economy and is relevant to a wide range of policies and issues currently facing the built environment. 

Why We Should Measure the Built Environment Sector

Construction, management and maintenance of the built environment

The built environment is important.  We are surrounded both by it and by its construction, management and maintenance. Of necessity, there is an industry, in fact a collection of industries, that create, manage and maintain the built environment.

 The building and construction industry, at around seven percent of gross domestic product (GDP), is responsible for on-site work, but with that work the construction industry brings together an extensive network of suppliers in production of the built environment.

This can be thought of as the difference between an industry cluster, made up of contractors and sub-contractors supported by plant and equipment suppliers, consultants, manufacturers, distributors and others, and the on-site work that is measured as ‘construction activity’. Then, once produced, buildings and structures need to be maintained.

 A term which encompasses the large number and diverse range of participants and industries in the production, operation and maintenance of the built environment, from suppliers to those responsible for management and maintenance, is the Built Environment Sector (BES). The Australian BES combines data for 16 industries, in one of the largest and most important industrial clusters. All else equal, better data leads to better informed policy.

The Australian Built Environment Sector

The method used to measure the size and extent of the BES is to collect the data for output and employment for the relevant industries and sub-industries available from the Australian Bureau of Statistics (ABS). Economic activities are subdivided into industries, which are groups of firms with common characteristics in products, services, production processes and logistics.   


 

Industry value added (IVA) is an estimate of an industry’s output and its contribution to gross domestic product (GDP), and is broadly the difference between the industry’s total income and total expenses. Employment and IVA in current dollars for industries is provided annually in Australian Industry (ABS 8155), with the most recent issue for 2017-18. The three largest contributors to BES output and employment are Construction (1,115,000 employed), Property operators and real estate services (341,000) and Professional, technical and scientific services (248,000). 

 

Macroeconomic Significance

Construction projects have many participants and extensive linkages with other sectors, measured through the industry’s high multiplier effect of close to 3. Through those linkages the impact of construction on other parts of the economy is much greater than the direct contribution, which gives the industry an important macroeconomic role, seen clearly in the effects of the Commonwealth Government’s fiscal response during the financial crisis in 2009-10.

Separating the BES from the other industries in the ABS data shows how that government spending on school buildings and infrastructure flowed through to the wider economy over the following year. Later, in the residential boom from 2013-17, the BES supported output across the economy during the transition at the end of the mining boom, as business investment fell from 18 percent of GDP to 8 percent.

Another factor that regularly emerges is capacity constraints, which strongly affects prices and is again becoming an issue with current infrastructure projects. The quantity of materials like gravel and concrete that can be produced in one year is limited, there are only so many engineers and project managers, and so on. The ABS data also shows a significant part of the 2009-10 spend went on increased prices and profits for building and construction projects, and the mining boom significantly increased wages in the engineering sector.

With over ten years of data measuring the BES its relationship to the business cycle can be identified, and the output and employment indicators used as a factor in the pipeline of planned infrastructure projects. The BES also appears to be a potentially useful leading indicator of activity in the wider economy.

Policies, Objectives and BES Metrics

In a time of rapid urbanisation and great social and environmental challenges, the built environment and city policies have become central issues in public policy. The quality of the built environment the BES delivers is a major determinant of our quality of life. Further, in a fundamental sense, how cities function depends on how well the BES can deliver the projects required, and the 37 capital and regional cities in Australia generate two-thirds of GDP.

There are many issues affecting the built environment, many of which are wicked problems of great complexity that range widely across industries, institutions and regulatory systems. How measuring the BES helps is by providing an overview of the value chain, from suppliers to end users, and offering a view of pathways to future policy goals. It does this by allowing possibilities for deeper integration between these participants. For example, contributions to reducing the carbon footprint across supply (particularly concrete), construction (transport) and commercial and industrial use (energy) could be allocated across the BES with targets for each sector. And if sufficient firms were to commit to the target, many of which are already investing in modular building, rooftop solar, improving energy efficiency and so on, this could be done by industry instead of government.

For government, an important area of application could be evaluating the effects of the City Deals and Smart Cities policies, with their focus on the built environment. There are now nine City Deals underway in Australia, bringing together federal, state and local governments in a long-term strategic plan, typically focused on transport infrastructure and economic development. The Western Sydney Airport deal is a good example. The BES is the transmission channel for turning that investment into infrastructure, communities and jobs. Similarly, the rollout of smart city technologies will involve

These City Deals and Smart Cities policies come under the Department of Infrastructure. A problem they identify is the lack of current data on the effectiveness of these policies:

 



It is important that we are able to measure the success of our Smart Cities Plan, particularly our City Deals which will outline defined development goals. For many of these goals, there is no baseline data readily available to determine and track a city’s performance. We will work with the states and territories, councils, communities and the private sector to identify key city metrics and the data required to assess performance. This data will be critical in the design of targeted policies, reforms and capital investments, and to measure the effectiveness of these actions.

The BES metric of most interest could be changes in employment, in both the number and composition of jobs. Over the ten years of a City Deal, jobs in the BES are created first in supply industries like materials, manufacturing and construction, then in the demand and maintenance industries like property, real estate and building services. From this data other metrics like industry value added per employee can be found. A significant part of the economic growth after the city deal will be from growth in the region’s BES.

In a similar way, the BES also allows a view of industrial development. Economies grow by upgrading the products they produce and export, but the technology, capital, institutions, and skills needed to make new products are more easily adapted from related products with common labour and capital requirements. This network of relatedness between products means that industries move through a product space by developing goods close to those they currently produce. The technological options available for an industry are strongly influenced by its current position in the BES product space and its ability to adapt to new products.

With the wide range of new production technologies currently emerging, such as 3D printing of concrete, automated machinery and buildings made with new materials like engineered wood, the BES is a laboratory for the fourth industrial revolution. Because it is not possible to know now, which of these technologies will work at scale, a role of policy as facilitator will provide opportunities for new methods of production, organisation and management to be tested on demonstration projects.

Another issue that has arisen is build quality and product safety. The recent Shergold Weir report -Building Confidence - highlighted how difficult policy-making in the built environment is. The report mainly addressed the issue of flammable cladding, and made 24 recommendations, but acknowledged these were the responsibility of state governments in Australia. There is a wide variety of legislation, and different parties are involved during design, construction and certification (professional services, contractors and suppliers, and public and private certifiers respectively).

In February the NSW Government announced the appointment of a Building Commissioner, following the report’s central recommendation, to act as a consolidated building regulator with responsibility for licensing and auditing designers, requiring their building plans to specify a building that will comply with the Building Code of Australia, and for builders, who will have to declare that buildings have been built according to their plans. Banks have risk compliance officers, the BES may need product compliance officers.

The Commissioner’s proposed role cuts across the BES, taking the objective of product safety and built quality and allocating responsibility across the supply chain by having the relevant compliance and certification required for all parties at each stage of design, construction and operation. Consolidating the data on the range of industries and firms involved supports that role, and could improve the effectiveness of policies.

Finally, taking a broader view of an industrial sector provides perspective on its role and significance in economic and technological development. When economic activities are spread across a wide range of individual industries the contribution of the whole is not obvious. This is why the tourism industry has an annual Tourism Satellite Account produced by the ABS. This brings together the contributions of a number of industries like accommodation, tour operators and entertainment, to estimate their total output and employment. The contribution of tourism to GDP was 3.1 percent in 2017-18, and the share of employment was 5.2 percent.