THE CIVIL CONSTRUCTION INDUSTRY IN BRAZIL: A COMPARATIVE STUDY IN RELATION TO UNITED STATES AND EUROPEAN UNION

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1 THE CIVIL CONSTRUCTION INDUSTRY IN BRAZIL: A COMPARATIVE STUDY IN RELATION TO UNITED STATES AND EUROPEAN UNION Luiz Carlos Brasil de Brito Mello 1, Sergio Roberto Leusin de Amorim 2 and Patricia Fraga Rocha Rabelo 3 1 Avenida General San Martin 646/501-Leblon-Rio de Janeiro-RJ-Brazil-CEP: Rua Passo da Pátria, 156,Bl.D, s.541-são Domingos-Niterói-RJ-Brazil-CEP: Rua Passo da Pátria, 156, Bl. D, s São Domingos- Niterói-RJ-Brazil-CEP: Abstract: The main objective of this article is to compare civil construction industry in European Union and in United States, considered as benchmarks, to the same industry in Brazil. From this comparison, the authors determine existing gaps between Brazil, European Union and USA as concerns civil construction industry. They also identify main actions needed in order to decrease these existing gaps. Based on existing data from Brazilian government departments, civil construction industry s impacts are described. Importance of civil construction industry in EU and USA is also explained, as well as how this industry fits in the economy and its main problems and challenges for now and for the future. Same methodology has been used to study these three economies (Brazil, USA and EU) in order to make possible comparisons among them and from that to elaborate possible solutions for areas where Brazil has a worse performance in civil construction industry. Finally, using several quality tools and supported by civil construction industry s technical associations, authors conclude on necessary priority actions and establish who is responsible to improve performance of Brazilian civil construction industry. Keywords: benchmarking, building, civil construction, modernization. INTRODUCTION Over the last years, civil construction industry in Brazil has suffered major transformation, from times of few investments to times of lots of money being invested in building construction. This change has been intensified mainly due to government investments, new laws that make easier to investors to recap houses and apartments that are not paid, obtaining of new money from stock market and the Quality and Productivity Brazilian Plan (PBQP-H) that has disseminated through industry concepts of total quality management. Due to that, new organization and technological innovation models have been used by the industry. As a direct result from that, there are some dynamic and well managed companies in the industry that can be compared to similar ones in USA and European Union. The existence of some Brazilian companies in other countries proves their financial and technical backgrounds. However, most of the industry s companies have met many problems to face these new challenges and results presented are far below of what is desired to respond to the Brazilian society needs

2 OBJECTIVES This paper is result of a research sponsored by MDIC (Brazilian office of development, industry and trade) associated with FIESP (Industry Federation of the State of São Paulo) which main purpose is presenting ideas for an industrial policy for civil construction sector- buildings. Paper s authors took part of group responsible for the study and, in this paper; their main intention is to compare civil construction industry's regulations and performances in United States, European Union and Brazil with the main objective to consider European and American civil construction performance, taken as benchmarks, in relation to civil construction industry in Brazil. This work also describes civil construction role industry in Brazilian, European and American economical scenarios, their main problems, challenges and solutions, as well as ways to resolve such problems. So, authors' intention was to establish comparisons among civil construction in Brazil, USA and European Union in order to enable foresight of solutions applied to those more developed, USA and EU, which will bring new ideas to Brazilian civil construction industry and thus permit closure of future gaps. METHODOLOGY This paper has been based on widely well known public statistical data or references. First providence was selection of main keywords, in order to facilitate research in public and private sources: papers, theses and dissertations, internet sites, American and European governmental statistical bureaus, American and European professional associations. Data research and compilation was done on March-June 2008 time frame, but Brazilian data only show results up to Comparison between available indicators, which used similar concepts, resulted in selection of those which made such comparison easier. Thus, it has been possible to develop a performance measuring table of civil construction industry in Brazil, USA and European Union. It is important to say, according to the first conclusions obtained, that there are not many available data for Brazilian civil construction industry. It is very difficult to find trustable data about different segments belonging to the industry. General number of buildings, in m2 or number of units, which is available in national data from USA or EU, is not available in Brazil. Besides that, even the few available indicators sometimes are not comparable. Another problem resides in gaps between data measurement and publishing dates. In consequence, extensive analytical work is needed in order to provide a conclusion. On the following part, a brief analysis of civil construction industry in Brazil, USA and European Union, as well as their performance evaluation, using the previously selected indicators will be presented. COMPARING BRAZILIAN CIVIL CONSTRUCTION INDUSTRY WITH USA AND EUROPEAN UNION Civil construction industry in Brazil, USA and European Union, their main challenges and problems now and in the coming years, will be briefly described, with objective

3 to determine how Brazilian civil construction is compared with those two and verify how existing gaps can be eliminated. Due to different methods used to classify work activities in each country it was very difficult to compare parameters of activities and costs. To solve this problem and make easier to establish such comparisons, it was decided to use a concept known as construction cluster, which is considered more useful to make comparisons. BRAZILIAN CIVIL CONSTRUCTION INDUSTRY Civil construction industry consists of a very intricate series of activities with different complexity levels, which are interconnected to a much diversified number of products. Each product with different technological processes is linked to several types of demands. The industry has segments very intensive in capital and technology like cement, steel mills etc. There is also a lot of service SMEs which have a very small technological content. It can be said that one of the civil construction industry's main characteristics is to be very heterogenic (Amorim, 1995: Mello, 2007). Civil construction industry is responsible for a very important amount of Brazilian GNP, participating with 13, 8% of it (FIESP, 2005). On Table 1, which has been adapted from different data from FIESP (2005), shows Construbusiness s participation in Brazilian GNP. Table 1: Construbusiness s participation in Brazilian GNP Source: Activity Construction materials 4,6 % Other materials 0,8 % Equipment and Machinery 0,2 % Construction (Building, Heavy construction) 5,2 % Services (Engineering projects, Realtors, Building Maintenance) 0,5 % Source: adapted from FIESP, 2005 GNP s participation As said before, civil construction industry is a very important sector of Brazilian economic scenario and is responsible for a wage value of R$15, 5 billion, 5, 2% of GDP, and approximately 9% of employed people (IBGE, 2005). Industry s GDP is approximately R $184, 54 billions and the intermediate consumption value of it, according to FGV (2006), is approximately of R$181, 69 billions. Almost 55, 6% of the aggregated value generated by the industry is due to informal sector and 37% is due to formal sector, which pays tributes of almost 45, 69% (CBCC, 2005). There are 105,469 companies working in civil construction with around 1,600,000 employees (IBGE, 2005). Almost 93% of these companies are SMEs that employ up to 29 people. Nowadays, many civil construction owners are trying to capitalize their companies through the stock market. From 2005 to 11/2007 there were 28 stocks launching of civil construction companies in BOVESPA (Brazilian stock market) with IPOs of almost R$ 9, 5 billions. In order to have stocks in stock market these companies have to improve their management processes, audit their balance sheets and avoid taxevasion

4 Civil construction financing increased almost 430% from 2000 to 2007 and companies are capitalized because of IPOs. Besides that, since credit in sector is very small, around 2% of GDP, experts believe that there is plenty of room to grow. Just to establish comparison, in Netherlands it is 105%, in Spain 46% and even in countries in similar to Brazil such as Chile, Argentina and Mexico it is 17%, 4% and 11%. These figures show that there is room for improvement. Nowadays, many industry s executives think that IPOs is the easiest way to get resources. But they forget that before to get it they have a hard homework to do. Another point to be considered is that investors are loosing attraction to these IPOs. Experts believe that up to the end of this decade a lot of mergers will happen (Portal Exame, 2007: Portal Exame, 2008). BRAZILIAN CIVIL CONSTRUCTION INDUSTRY SUB- SECTORS Civil construction industry in Brazil can be classified as: a) construction materials, b) building construction, c) heavy construction. There are other classifications such as: a) Building construction, b) heavy construction as in roads and bridges and c) plant construction (Sebrae, 2005). With no doubt, civil construction industry is a very important economic sector which has a lot to contribute to Brazilian development, once the sector's specificities are considered. They are (Sebrae-MG, 2005): a) high leverage effect on the whole industry chain, b) lower investments needs once there is a low relationship capital/ product, c) very intense employment of people, mainly non skilled ones, d) very low usage of imported items. Sebrae-MG (2005) has elaborated a industry s profile, which has shown the following characteristics: a) supply has a strong correlation with income and credit conditions, b) very strong job generation mainly with non skilled people, c) very low participation of formal employment when considered total amount of people employed in sector, d) industry has a lot of difficulties to comply with rules and regulations, e) a very low competitiveness and productivity when compared to developed countries and f) a not very intense use of technology particularly if compared to developed countries. The building sector, which is main focus of this paper, has 2,05% of Brazilian GDP and 39,7% of civil construction industry GDP (IBGE/PAIC, 2005). The building sector was chosen due to its peculiarities which pose restrictions to sector s development. They are: a) very low productivity, b) very poor quality, c) not very open to technological improvements, d) very high utilization of non skilled people and e) very high people s turnover (Mello, 2007). Recent research done by industry associations indicated what the bottlenecks are and what are the actions needed to solve to them (Amorim, 2008). The central symptom of the industry is a very low productivity, which main causes can be listed as: a) lack of working qualification; b) lack of compliance and poor standardization of materials; c) very bureaucratic regulations and requirements; d) lack of information technology's utilization; e) lack of high productive equipment' usage and; f) very high industry taxation

5 It can be seen that many of aspects that contribute to low productivity have a relationship or have the same origin. As an example lack of compliance and poor standardization of materials have as its main reason ignorance of standards or the fact that government requirements and standards are weak; same applies to lack in project professionals formation which links to professionals not using tools such as value engineering or lean production techniques. On the other hand, lack of usage of high productive equipment can be explained by factors such as: high taxation for them as well as cash flow problems when schedules are postponed bringing difficulties to equipment's usage. CIVIL CONSTRUCTION INDUSTRY IN EUROPEAN UNION Civil construction industry is also very important in European Union and has a participation of 4 to 9% in EU participating nation s GDPs and is responsible for 4 to 10% of unemployment rate (EFILWC, 2005). Its main features are (EMCC, 2005): a) a highly privileged internal sector, b) a very high number of SMEs including professionals, c) a very reasonable number of big companies with international portfolio, although decreasing when compared with rest of the world, d) low investments in research and development, mainly when compared to Japan. Currently, the industry has some challenges in Europe. A lot of external facts are modifying it, and companies, employees and industry associations will have to face these challenges that are relative to new members of EU, globalization and new regulation for services inside EU. But competition varies from one sub sector to other and from one country to another. Other very important challenge is European population s ageing, which brings difficulties to manpower recruiting. However, countries recently added to EU bring new demands and markets to be developed. Another challenge is Sustainability which brings new requirements and regulations to be met by industry. European authorities are aware of this and they will respond to it. Another pressure to sector is relative to new safety and health requirements and regulations that are applied to construction processes and will force industry to improve such construction processes. Other point is relative to Public-Private Partnerships that bring new necessities of financing and operation of enterprises, which will have to be understood by industry. Also growing usage of information technology in materials and construction should be considered by industry. It will bring an increase of productivity and quality but will also bring new needs of processes and people skills. Through utilization of techniques as lean construction, the industry intends to minimize mistakes, reduce costs and schedules and also improve quality. Other tools that will help are: a) pre-manufactured items usage, b) utilization of MRP II in construction etc. However, in order to utilize these new concepts will be necessary to hire high skilled people with new qualifications (EFILWC, 2005). Searching for new qualifications is a must for industry growth and to respond to intense global competition and the customer needs for a better productivity and quality. This is important, not only for companies but also for employees that need to increment their employability. The European Monitoring Center on Change (2005) assures that this is

6 not a must for big companies that will not have problems with it, but for SMEs that are in bigger numbers and do not have proper tools to settle it. CIVIL CONSTRUCTION INDUSTRY IN THE UNITED STATES Civil construction industry is responsible for 8, 47% of American GDP in 2007 (CIR, 2007). Industry in USA is very similar to the one in European Union. Main activities are: a) construction of new buildings, b) site preparation, c) enlargement and modifications in existing buildings, maintenance and repair. It can be divided in three main sectors:1) building construction including general contractors, which are responsible for commercial and residential buildings, 2) heavy construction including roads, highways, tunnels, etc and 3) special services such as painting, electrical, plumbing etc. Civil construction industry in USA is one of the biggest economical activities with almost 883,000 companies. Of this amount, approximately 268,000 are building sector, 64,000 are in heavy construction and 550,000 works with special services. Most part of the companies is SMEs and almost 65% have no more than 4 employees and only 1% employees 100 or more employees (USBLS, 2006). The industry, according to BLS employs almost 7, 7 million people and 1, 9 million of freelancers. Almost 64% of jobs in the industry are in special services, 24% in building construction and the remaining in heavy construction. Industry is responsible for 22% of the world total civil construction output. Shortage of skilled people in industry has led to an increase of mechanization as a way to increment productivity and fulfil needs. Another way to solve this problem is to use of pre-manufactured items (Construction Industry Institute, 2003). However, it is important to say that this is not a real alternative for shortfall of people since these techniques also need high skilled people. On next topic, a table will be shown with indicators to compare Brazilian, American and European civil construction industries. AN ANALYSIS OF PERFORMANCE AND REGULAMENTORY SITUATION Civil construction, as seen in table 2, has an important role in Brazilian, American and European economies. Although there is a huge difference among respective GDPs of them, there are some similarities as well. Such as: a) the major portion of companies is SMEs, b) all countries have problems relative to people s qualification, c) all have problems in relation to safety and health issues and d) they are the major employers in the three regions

7 Table 2: Indicators comparison for Brazil, USA and European Union. Indicators Brazil USA European Union % GDP 5,2 % (1) 8,47 % (11) 10,2 % (21) Sales US$ 40,98 billions(2) US$ 475,6 billions (12) US$ 710 billions (22) Number of companies (1) (13) (23) Average sales US$ * US$ * US$ * People employed (1) (14) People occupied (3) Average productivity US$ 6, / US$ 41, US$ employee (4) /employee. (15) 31,247.44/employee Profitability 24,35 % (5) 67,5 % (16) Number of managers and engineers 125,420 (6) 623,000 (17) 550,530 (25) Engineers/ Hourly people total 2,4% 6,5% 12,2% Engineers/ Hourly people employed 8% 8% 12,2% Time of formation of people with university degree Time of formation of people with technical school 5 years (7) 5 years (18) 5-7 years (26) 2-3 years (8) 3 years (18) 2-3 years (26) Nº of technical requirements 938 (9) ND 1733 (27) Average schedule for building construction Average permits obtainment schedule 30 months(10) 10 months (19) 14,3 months (28) 66 days (10) 30 days (20) 44 days (29) (1) IBGE/ PAIC (2005) GDP 2005= R$ 1,937 trillions; (2) IBGE/PAIC (2005). US$ 1,00= R$ 2,433. (3) For formal jobs, PAIC IBGE and for informal estimated though the relationship for the year 2003 for formal and informal jobs (SINDUSCON-SP, 2003); (4) FGV (2006). US$ 1,00= R$ 2,3504; (5) PAIC (2005). Sales=R$ 100 billions e R$ 75, 65 billions of Total expenses (peoples expenses+ materials+ other costs and expenses). Profitability is (Total sales Total expenses)/ Total sales; (13) It was considered only companies that work in the building construction sector (US Bureau of Labour Statistics); (16) US Census Bureau (2002). Considered sales of U S $ 475, 6 billions and US$ 154,49 billions of total expenses (people expenses= US$ 53, 48 billions, materials= US$ 97,69 billions, other expenses = US$ 3,321 billions). Profitability is: (Sales Total expenses)/ Sales; (19) Data from Accessed in 23/3/2008; (20) Data only for Houston city. See: Accessed in 25/3/2008; (21) ECTP (2007); (22) Accessed in 23/3/2008; (24) Aggregated Value of 134, 6 billions Euros (European foundation for the improvement of living and working conditions, 2005) e employees (Eurostat, Accessed in 26/3/ Euro = US$ 0, ; (25) Eurostat (2008); (28) Estimated, American productivity= 100 and European=70; (29) Accessed in 27/3/2008 * Obtained dividing Sales by number of companies. There is a large difference relative to sales in each region considering its economy size. Sales of Brazilian companies are 8, 6 % of sales of the American companies, which can be explained by sizes of each economy. Nowadays, civil construction industry in USA is facing hard times due to a serious crisis related to the subprime market. There is a large difference when productivities are compared. European productivity is 75 % of American's and Brazilian's is 15 % of the American. This shows a huge gap between them, which must be reduced

8 Building construction schedules in Brazil are three times bigger than in USA and two times than in Europe. Time to obtain construction permits in Brazil is two times, in average, bigger than USA and 50 % bigger than time spent in Europe. Figure 1 will show these differences. Figure 1: Comparing permits obtention schedules and construction schedules in Brazil, USA and European Union Source: 3,5 3 2,5 2 1,5 1 0,5 0 Building Construction Schedule Time to obtain Construction Permits Brazil USA European Union When other Brazilian industries productivities (that were selected randomically and values were obtained dividing aggregated value by number of employees -IBGE, 2005) are compared to civil construction s productivity, it can be seen that civil construction productivity is lower than other industries. It can be explained by factors as (Amorim, 1995; Mello, 2007): a) low skilled people; b) SMEs absence of investment in training people; c) low investment in R&D; d) lack of companies' investments in techniques such as pre-manufacturing, modularization, Information Technology, BIM usage, MRP II etc.; e) low utilization of pre-planning work schedules; f) high rework and waste of materials. Formal companies in civil construction industry are responsible for 26, 6 % of the aggregated value added according to FGV-Projects (2004). The same study concluded that formal companies add three times more value than informal ones. Companies that operate informally are encouraged to act like that due to a lack of government control, absence of technical requirements and a very weak products certification process. Investigations conducted during 1998 and 2002 had verified that industry needs to adequate itself to market requirements. In consequence, much effort has been utilized to implement quality management programs such as PBQP-H, which has been conducted by government and has been very successful. Currently, there are 25 quality programs and in some cases there is more than 90% of compliance for materials included on these programs (PBQP-H, 2006). Other modernization measures have been adopted by the industry like creation of SINAT, which is a technical program to generate technical requirements when they do not exist and a modernization of certification processes. The main objective to product certification is to adequate product requirements to international needs. A product certification will give a different status to these products, and will be noticed not only by the consumers but also by the whole supply chain

9 Another point is the industry's dawning conscience of environmental matters' importance, not only to attend customer and government needs, but also from a financial point of view. Some companies are profiting from waste management, adopting clean energy sources, utilization of co-energy systems, utilizing clean development systems and substituting non renewable raw materials for recycled materials. CONCLUSIONS As seen in this paper there is no doubt that civil construction industry has a very important role in Brazilian economical scenario, which can be perceived by its participation in GDP, its importance in supply chain when interacting with an extensive number of suppliers, commercialization and maintenance services (Mello, 2007). In order to maintain its important role, industry is facing equally important changes, facilitated by factors such as government expenses recover, new government laws and requirements that make easier construction bureaucracy, companies financing through stock markets and quality management programs such as PBQP-H. However, there are remaining productivity and quality problems that need to be settled. Problems of non conformance, lack of standardization and lack of workers' qualification have not been touched efficiently yet and they need to be approached and settled. Another factor that has brought a lot of uncertainty to industry is the big crisis that the world is facing and there are no signals that it will end in a near future. On this paper, authors had in mind to make a comparison between the building sectors in Brazil, USA and the European Union. To make easier such thing they have chosen indicators, previously agreed. This paper is inserted in the academy efforts to discuss Brazilian civil construction industry and find tools and techniques that can eliminate gaps relative to developed countries. Nowadays there is a housing deficit of eight millions of unit in Brazils (Planhab, 2008) and to solve this problem is necessary to create a new paradigm shift towards new management techniques to resolve the issue. Authors s main intention was to provoke a discussion about the subject to identify what are the problems and their possible solutions. REFERENCES ABRAMAT Associação Brasileira de Materiais de Construção. Capacitação e Certificação Profissional na Construção Civil e Mecanismos de Mobilização da Demanda. São Paulo, Amorim, S.R.L. Tecnologia, Organização e Produtividade na Construção Tese (Doutorado em Engenharia de Produção), Programa de Pós Graduação em Engenharia de Produção, Universidade Federal do Rio de Janeiro. Rio de Janeiro Amorim et al, Proposta de Política Industrial para construção civil, Edificações, DECONCIC, FIESP, São Paulo, 2008 Brasil. ABNT Associação Brasileira de Normas Técnicas. Normas técnicas para a construção civil. Brasília, (9) Brasil. Ministério da Educação - MEC. Conselho Nacional de Educação - CNE. Parecer CNE/CES 1.362/2001. Diretrizes Curriculares Nacionais dos Cursos de Engenharia. Brasília, (7; 27)

10 Diretrizes curriculares nacionais para a educação profissional de nível técnico. Brasília, (8) CONFEA Conselho Federal de Engenharia, Arquitetura e Agronomia. Quantitativo de Profissionais (dados 24/04/2008). de Confea-GTM, Lucas Benevides, Brasília, 25/04/08. (6) CIR - Construction Industry Roundtable Available in < > Access: 04 mar (11) EFIWLC - European Foundatin for the Improvement of Working and Living Conditions Available in: < >.Access:25/2/2008. (23) EMCC-European Monitoring Centre on Change. EMCC dossier on the European construction sector Available in :< >. Access: 18 fev FGV Projetos. A tributação na indústria brasileira de materiais de construção. São Paulo: ABRAMAT, 2006a. FGV Projetos. A carga tributária incidente no preço de habitações populares. São Paulo: Sinduscon-SP, mimeo, 2006b. FGV Projetos. Informalidade e Carga Tributária Propostas para superação dos obstáculos na Construção Civil. SINDUSCON-SP/ FGV- Projetos, Available in: < Carga_tributaria_FGV_Projetos.pdf>. Access: IBGE - Instituto Brasileiro de Geografia e Estatística. Contas Nacionais. Diretoria de Pesquisas Available in: < >.Access: 01 mar /PAIC Pesquisa anual da Indústria da Construção. Brasília Tabelas sinóticas. Sistema de Contas Nacionais - Brasil, Brasília, Available in: 04_2005/tabsinotica14.pdf; Access: 10 mar Manseau, A; Shields,R.; Building tomorrow: innovation in construction and engineering, edited by Andre Manseau and Rob Shields, Ashgate, Burlington, 2005 MEC/Espana (2007). Implantación del nuevo sistema educativo. Available in: Access: 25/04/2008. (26) Mello, L.C. B. B. Modernização das pequenas e médias empresas de Construção Civil: impactos dos programas de melhoria da gestão da qualidade Tese (Doutorado em Engenharia Civil) - Programa de Pós Graduação em Engenharia de Civil, Universidade Federal Fluminense. Niterói- RJ, NCARB, National Council of Architectural Registration Boards. Available in: < Access: 12 abr (18) PBQP-H - Programa Brasileiro de Qualidade e Habitação - Ministério das Cidades. Available in: < >. Access: 10 abr Serviço Brasileiro de Apoio a Micro e Pequena Empresa- Minas Gerais- SEBRAE-MG. Minas Gerais. Perfil Setorial da Construção Civil, Available in < > Access: 31 ago Sindicato da Indústria da Construção Civil no Distrito Federal SINDUSCON-DF. Available in: Access: 22/03/2008. (10)

11 Sindicato da Indústria da Construção Civil no Estado de São Paulo - SINDUSCON-SP. Setor da Construção em Números Available in: < > Access: 04 mar USBLS - US Bureau of Labor Statistics. Career guide to industries: Construction Available in: < > Access: 3 mar (12, 14, 15, 17)