Defining and Measuring the Built Environment Sector

Topics

The Standard Industrial Classification System
Building and construction in the SIC
Narrow v broad -Defining the Built Environment Sector
Measuring the Built Environment Sector
Macroeconomic role of the Built Environment Sector
Satellite account for the Built Environment Sector

GDP = C + I + G + NX

National accounts are the annual publication of a country’s statistical collections relating to economic activity. Estimates of national production, income and output are produced, the triple identity.
Gross Domestic Product brings these together as consumer expenditure by households, business investment, government investment, and imports and exports.
This statistical system has been under continuous development for over 80 years. National Accounts provide the data used to identify economic performance and institutional structure, while defining the data required and standardising its collection, which is increasingly digital.

SNA

The internationally accepted standard for presentation of national accounts is the United Nations System of National Accounts(UN SNA1963, and much revised since). The production account adds up the output of private sector industries and public sector organisations.
This lays out guidelines for the methods to be used in data collection and analysis, which are then interpreted and applied by individual countries, sometimes with idiosyncratic results.
The conventions followed in collection and definition of data can differ between countries, affecting international comparisons. Also, data methodologies change within countries, which further complicates long-term analysis.

Revisions

For many reasons national accounts measures of quantities and values are revised over time, based on updates, the type of data, the frequency of collection, and the samples and models used.
Conceptual differences among economists and statisticians at different times in different countries have also influenced these statistics.

“Given these difficulties, it is easy to understand that conceptual changes are frequent ... One must also ask whether it is the constantly changing nature of the economy that calls for these conceptual revisions or whether they are an expression of our inability to settle conceptual issues”

(Morgenstern 1963:7)

Measuring Output is Difficult

The physical units of output of economic activity are not standardised or homogeneous, and non-standard products are a problem for output measurement, which should ideally be adjusted for changes in quality and prices.

• Dynamic economies have frequent improvements in quality across many

different products, new products and services are constantly invented and

introduced, old models are discontinued, and some products are custom made.

Output of many service industries is very difficult to measure, e.g. a tax return or visit to the doctor, and is often measured as the labour cost. Therefore, as the share of GDP of services grows, such as personal and household services, overall productivity growth slows down.
The building and construction industry is an archetype of a project-based industry with non-standardised products, other industries are shipbuilding, aircraft manufacture and many professional services.

Structural Change

Structural change is the change in industry shares of output over time. Australia between 1974 and 2016 had a long-term shift of economic activity from manufacturing toward mining and more labour-intensive service sectors. A major reason the national accounting system is regularly revised is to reflect these changes in the structure of the economy and the contribution of different industries.

ISIC

The macroeconomic aggregates in the national accounts are at too high a level to capture all economic activity, particularly the activity of companies (in the market sector) and other organisations (in the non-market sector, such as health or non-profit).
An industry classification system classifies companies and organisations into groups with similar characteristics.
The first Standard Industrial Classification (SIC) was produced for the US in 1937, with the United Nations International Standard Industrial Classification (ISIC) following in 1948. This had its most recent revision in 2008.

SIC Codes

Economic activities are subdivided in a four-level structure with the highest level alphabetically coded sections.

• Sections subdivide productive activities into broad groupings such as

“Agriculture, forestry and fishing” (A), “Manufacturing” (C) and “Information and

communication” (J).

The classification is then organized into numerically coded categories, which are two-digit divisions, three-digit groups, and, four-digit classes (which have the greatest level of detail).
SIC codes are therefore three and four-digit numbers representing industries, which are groups of firms with common characteristics in products, services, production processes and logistics systems.

Section F and Boundaries

Construction in the ISIC includes three groups:

• The complete construction of buildings (division 41)

• The complete construction of civil engineering works (division 42)

• Specialized construction activities or special trades, if carried out only as a part

of the construction process (division 43)

Where are the boundaries of firms, industries and markets? This is the big issue in industry economics. In construction statistics a lot of work is excluded, such as:

• Buildings for own use by industry, e.g. retailers like Westfield that do their work in

house.

• Work done inside public sector organisations by their own employees.

• Professional and technical services (divisions 69-75).

• Repair and maintenance is not counted.

• International contractors get classified differently across countries.

Built Environment Sector

Defining the Industry

Official statistics on the output of the construction industry capture on-site activities of contractors and subcontractors. However, construction links suppliers of professional and technical services, materials, machinery, products and other inputs into the built environment.
These two views have been called broad and narrow, with the narrow industry defined as on-site work and the wider industry as the supply chain of materials, products and assemblies, plus professional services such as management, architecture, engineering design and surveying.
The term that arguably best encompasses the extraordinarily large number and range of participants in the creation and maintenance of the built environment, from suppliers to end users, is the built environment sector (BES).

Research

The construction industry, as measured using the standard industrial classification of industries, is only one part of the creation and maintenance of the built environment. This idea has been around for many decades.
On-site building and construction has extensive linkages with other sectors, which gives the industry an important macroeconomic role. Through those linkages the impact of construction activities on other parts of the economy is much greater than their direct contribution.
Previous research in Australia (1997) and the UK (2000) found the broad industry in around twice the size of the construction industry.

Pearce 2003

Pearce, D. 2003. The Social and Economic Value of Construction: The Construction Industry’s Contribution to Sustainable Development, nCrisp, London.

Gross output was found for SIC three digit industry groups then added to get the estimate for the broad industry below.

Broad Industry is Twice the Size

Australian BES

Employment and value added data from Australian Industry 2015-16 is provided at three levels, for industries, divisions and subdivisions. Construction data is at the two digit division level, but data on Manufacturing and Professional and technical services is given at the three digit sub-division level.
This allows the contribution to the built environment sector of relevant parts of those industries to be identified.
After combining the on-site work done by contractors and sub-contractors with manufacturing, property and real estate services, professional services and quarrying, the built environment sector accounts for 16.4 per cent of total employment and 21 per cent of output, measured as industry value added, of the Australian non-government sector.

Total BES

Employment 1,748,727

Value added $227,528mn

Construction share:

Employment 59%

Value added 52%

BES

Australian Industry excludes the public sector but includes non-profits in industries like health and education, which are combined with private sector business to get a total for the selected industries, and thus measures the non-government part of the economy. As a share of total GDP in 2015-16 this was approximately 15%, and 12% of employment (adjusting for the 25% of GDP outside the Australian Industry sample).

Measuring the BES

Macroeconomic Role

The macroeconomic contribution of the BES to aggregate demand and employment is significant, and is one of the largest industry sectors in many countries.
It is also one of the most volatile components of the economy, with annual rates of growth or contraction greater, and often much greater, than changes in GDP, making the BES a key driver of the business cycle. Trends in BES activity and output have a significant effect on the national economy.
Investment is the most volatile component of GDP. Construction is the most variable part of investment. Non-residential building typically varies the most.

Business Cycle

Changes in the composition of output of the BES is a leading indicator of future demand as current projects complete, through changes in the level of early stage project preparation work, and new projects join the pipeline.
Through industry linkages and lags, such slowdowns or pickups in project preparation can be strongly procyclical, exacerbating the peaks and troughs of the business cycle. As the core of the BES, changes in approvals and commencements for building and construction can be used to estimate changes in the contribution to aggregate demand and output of the BES.
Because of the number of small firms found across the BES, the employment consequences of changes in activity levels are also significant.

Fiscal Policy

Measuring the BES provides also provides a way to measure the effectiveness of fiscal policy, when that involves changes in public expenditures on building and construction.
Discretionary fiscal policy, as a response to the business cycle, is an increase in public spending to counteract a downturn in the business cycle or a recession, typically targeting public investment in both social and economic infrastructure.
Tracking the impact of such expenditures through the economy is difficult, but would show up in a BES satellite account. This would also allow a finer-grained analysis of the employment effects of different types of projects and programs.

Satellite Accounts

A satellite account reclassifies expenditures usually presented in different industry groupings into a single sector. These are used to provide more detail on sectors that are not adequately represented in the national accounts.
The most widely found satellite account is for tourism, but they have been produced or proposed for a range of other industries such as health, the environment, R&D, information technology, infrastructure, non-profit institutions, human capital and households.
A satellite account for the production and management of the built environment, how it is created and maintained through project initiation, design, fabrication and construction to operation, repair and maintenance, would be the most representative of the BES.

Tourism

The diagram shows the structure of the satellite account for tourism in 2016-17.
Unlike traditional ANZSIC industries in the Australian National Accounts, tourism is not measured by the output of a single industry, but rather from the demand side, from the activities of visitors. It is the products that visitors consume that define what it is that the tourism economy produces.
Tourism’s share of GDP was 3.2% and employed 598,200 people.

Complexity

A Complex Business Environment

The built environment is very heavily regulated, and that regulation is typically spread out across different levels of government and other institutions. Includes building codes and standards, accreditation, OH&S, planning and land use, and security of payment and other industry-specific legislation.

Gann, D.M. and Salter, A.J. 2000. Innovation in project-based, service-enhanced firms: the construction of complex products and systems, Research Policy 29 (7-8), 955-972

Demand Side

Residential development
Commercial and industrial building
Engineering and infrastructure
Alterations and additions
Property management
Facility management
Informal building and DIY

Supply Side

Professional and technical services
Contractors
Trades and subcontractors
Materials
Manufactured products and components
Plant and equipment suppliers

“Software is eating the world”. Marc Andreesson2011.

Finally

There is a need for better information on the BES, which at present is not measured, despite the importance of the built environment in meeting the twin goals of economic development and social welfare.
How cities function depends in part on how well the BES can deliver the projects, management and maintenance required. A satellite account would provide more information on cities, and integrate the demand and supply sides of the built environment. All else equal, better data means better policy.
By aligning the industry classifications, the cumulative economic contribution of the many and various participants in the creation and maintenance of the built environment, from suppliers to end users, can be measured.

Cities and the BES

Cities are the drivers of the modern economy, and the world is rapidly urbanising. Like other industries, how we create and maintain the built environment is also changing with the impact of new technologies.
City policies involve significant infrastructure spending, and is often their main focus. However, it is the associated induced development around the new infrastructure that determines the quality of life and drives longer-term growth.
Measuring the BES over time also provides evidence of the effectiveness of city policies in promoting urban growth and development. A satellite account would capture that activity and complement existing city benchmarks such as travel times and access to services.

Recent Global Reports on Cities

The world’s 600 largest cities have a population of one million or more.

These cities generate nearly two‐thirds of global GDP, and this share is growing

as size and reach gives them a productivity advantage.

In 1980 there were fewer than 200 cities with a population over one million.