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Civil construction confidence improves marginally

But there is continued pessimism in the sector, justified by ‘underlying indicators relating to activity and profitability’ – economist.
The industry is suffering, as is the country’s long-term agenda for employment, equity and poverty eradication. Image: AdobeStock

Confidence in the civil construction sector improved marginally in the third quarter of 2021 but more than 80% of respondents to the FNB-Bureau for Economic Research (BER) civil confidence index are dissatisfied with prevailing business conditions.

The index, which has been hovering around the 20-point mark since the middle of 2017, rose by four points on a 100-point index to 17 in Q3.

FNB-BER reported that most underlying indicators worsened in the quarter, which explains the relative pessimism.

The slowdown in activity and profitability and persistently weak order books is of particular concern, FNB-BER said.

FNB senior economist Siphamandla Mkhwanazi said on Tuesday the underlying indicators relating to activity and profitability justifies the continued pessimism in the sector.

Mkhwanazi said the sustained low confidence was underpinned by a slowdown in construction activity.

Tendering competition eased somewhat but this was insufficient to offset the adverse effect of the lower activity on profitability, which deteriorated and also likely “kept a lid on confidence”.

Demand

Mkhwanazi said the lack of new work also remains a concern, with a very high percentage of respondents continuing to bemoan the lack of new construction demand.

“While the annual results of some larger firms revealed an improvement in domestic order books, this quarter’s survey results suggest that this is not the experience of the broader sector,” he said.

Mkhwanazi added that the civil construction sector relies very heavily on a struggling public sector and therefore the recent gazetting of the amendments to Schedule 2 of the Energy Regulation Act, further progress toward developing renewable energy projects through the Independent Power Producer (IPP) programme, and the draft version of the National Infrastructure Plan are welcome.

“However, this is only of value to contractors when the work materialises. Until then, activity will remain subdued,” he said.

Mkhwanazi said the survey results point to a slowdown in the growth momentum of investment in construction works in the third quarter.

Little evidence of promised ‘momentum’

Pessimism in the civil construction industry is almost entrenched despite Minister of Public Works and Infrastructure Patricia de Lille earlier this month maintaining that South Africa’s infrastructure drive to revitalise the economy and create employment is gaining momentum.

De Lille said a number of projects introduced as part of the government’s Economic Reconstruction and Recovery Plan (ERRP) have kicked off and are in construction and provided an update on the status of a number of projects.

Read: SA’s infrastructure drive ‘is gaining momentum’

The Infrastructure Investment Plan is the cornerstone of the ERRP announced by President Cyril Ramaphosa in October 2020.

This followed the government in July 2020 unveiling and subsequently gazetting the first tranche of 50 Strategic Integrated Projects (SIPs) and 12 special projects that have been fast-tracked to stimulate the economy post Covid-19.

Read: First post-pandemic-recovery infrastructure projects gazetted

Where are the ‘shovel-ready’ projects?

Ramaphosa said in July 2020 when the SIP projects were launched that the “shovel-ready projects” that have been fully developed for implementation will be the priority, ensuring ground is broken as soon as possible.

“Infrastructure investment is also an important signal to the economy that investment and expansion is happening, which improves consumer and business confidence, leading to increased economic activity,” he said.

However, the slow award and implementation of projects since then has drawn criticism from many industry stakeholders, including Master Builders South Africa (MBSA), the SA Forum of Civil Engineering Contractors (Safcec) and analysts.

The National Infrastructure Plan 2050 (NIP 2050), which was published for public comment in August, highlighted some of the problems facing the civil construction sector.

National Infrastructure Plan plagued by ‘diminishing capability’

In a section on the status of institutional planning and execution capability in 2021, the NIP 2050 said there is considerable evidence of diminishing capability to plan, finance, procure and implement critical network infrastructure.

It added that while there is also evidence of success, overall the aggregate numbers show diminishing outcomes that are not delivering to South Africa’s long-term agenda for employment, equity and poverty eradication.

The NIP 2050 listed a number of concerns that were highlighted by the National Planning Commission (NPC) in 2020, including:

  • A dearth of properly prepared and bankable projects.

  • Significant underexpenditure against annual budgets, resulting in the five-year spending trajectory being adjusted downwards every year since 2017.

  • Significant cost and time overruns and significant delays in the implementation of identified projects.

  • Unintended consequences of regulations and instructions that are not sufficiently and timeously reined in, such as those resulting in ‘mafia’-style tactics to forcibly secure participation in infrastructure and removing unpredictable and harmful procurement practices.

In a section in NIP 2050 on the status of the construction sector in 2021, it said the construction industry plays an indispensable role by providing physical infrastructure and is an important employer, especially for low- and medium-skill workers, and has important linkage effects into related goods and services.

It said government accounts for more than two-thirds of civil works revenue and about 40% of non-residential construction revenue.

Government spending issues

“The fall and uncertainty in government construction spending after 2014 has therefore had a material effect on the health of the South Africa[n] construction sector, and especially the sector involved in civil works,” it said.

Read: Ramaphosa speeds up funding for infrastructure

NIP 2050 added that construction is a low-margin business that requires constant cash inflow to maintain employment, improve on business processes, build up a balance sheet and train and develop staff.

It said weakening project flow and spending by the public sector has led many large civil construction companies to turn their attention to foreign contracts and/or to survive in South Africa by shifting their commercial activity away from construction.

“There is evidence of an unprecedented number of large contractors having filed for business rescue or liquidation, largely attributed to a combination of a lack of large government infrastructure contracts, late payment and the taking on of problematic and loss-making contracts.

Read: Is SA heading toward life without a construction sector?

“The value of public listed construction companies fell by 60% to 70% between 2008 and 2018, although some part of this may have been caused by the sale of companies to black empowered entities that are not listed.

“There has also been some business failure and significant skills emigration overseas. Construction employment fell by about 35% between 2014 and 2019,” it said.

Foreign businesses may need to be called in to assist

NIP 2050 stressed that the state infrastructure investment drive will be calling on a severely depleted delivery sector, which may result in increased introduction of foreign businesses to assist in the delivery of major projects.

It said the government’s infrastructure investment drive will act as an economic stimulus “if delivered by South African construction companies and domestic supplier industries”.

“The pace at which this can happen depends substantially on the ability of the state to create confidence in the sector,” it said.

“This in turn will require a transparent and credible pipeline of projects and reformed procurement processes.”

Read: Building the post-Covid SA calls for greater vigour

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If you just asked a building material supplier this article could be over in one sentence.

Well ja/nee. I think this is where the problem lies: “government accounts for more than two-thirds of civil works revenue”. The ANC, mostly is “government” (SANRAL, Eskom, municipalities, SOEs and state entities) and are invariably hopelessly incompetent or corrupt, or both. So there is endless jockeying amongst connected contractors scrabbling for tenders with BEE points, tax compliance, CIDB silliness, bungling by oaficials and plain, old fashioned bribes to be negotiated. This takes years, literally from conception to award.

Now factor in Patel’s disgraceful fiddling and a dash of ANC construction mafia, covid and rioting and things look very bleak. Material prices (thanks Patel) have rocketed so there are going to be plenty of sad faces in construction methinks.

End of comments.

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