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Construction activity rebound expected in third quarter

After dropping to a record low.
The results for the second quarter have been described as abnormal and ‘should not be mistaken for a likely future trend’. Image: Shutterstock

Activity levels in the building and construction sectors are expected to improve dramatically in the third quarter of 2020 following the lifting of Covid-19 lockdown restrictions after unsurprisingly plunging to a second consecutive record low in the second quarter.

The Afrimat Construction Index (ACI) slumped below 100 for the first time to 97 in the first quarter and nosedived to 65 in the second.

The ACI, compiled by economist Roelof Botha on behalf of Afrimat, is a composite index of the level of activity within the building and construction sectors.

Botha stressed on Thursday that the ACI’s trend for the second quarter is abnormal and should not be mistaken for a likely future trend.

“The fact that construction activity declined as dramatically as it did is not only related to the stringent lockdown regulations but also to the small size of the sector’s direct contribution to GDP, which is currently only 3%,” he said.

Crucial enabler

“However, the construction sector is a crucial enabler of downstream economic activity, especially as it pertains to capital formation. This is one of the reasons infrastructure development has been identified by the government as a key priority for the economic recovery plans.”

Botha agreed that it will be easier for the construction sector from a statistical viewpoint to recover strongly in the third quarter because activity levels have fallen so low.

He is adamant that every single ACI indicator will improve in the third quarter and move back up above 100, the base period for the index.

However, Botha said it remains to be seen if construction and building sector activity levels match those of the third quarter of 2019.

“This is a volatility correction improvement that will occur,” he said.

“A structural increase will only follow after lower interest rates and government’s strategic infrastructure projects programme have gained some momentum and people realise they have a lot more money to build a house at current interest rates than they used to.”

Recovery hopes have a tangible driver

Botha said government’s infrastructure investment drive is arguably the most important tangible driver of recovery in construction.

This is a reference to President Cyril Ramaphosa’s confirmation at the Sustainable Infrastructure Development Symposium in June that government has placed infrastructure at the centre of the stimulus the economy needs to achieve a sustainable recovery.

This was followed by government in July unveiling 50 strategic infrastructure projects (SIPs) and 12 special projects involving a total investment of R340 billion as the first tranche of a massive infrastructure expenditure programme to drive the post Covid-19 economic recovery effort.

The initial SIP projects are expected to create an estimated 275 700 jobs in six sectors: water and sanitation, energy, transport, digital infrastructure, agriculture and agro-processing, and human settlements.

September promise

Botha said these projects have been declared strategically important and will be fast-tracked to secure the necessary approvals, including municipal rezoning and water rights, by the end of September.

In addition, these projects have the necessary sovereign guarantees – and approvals for increased borrowing have already been secured, while funding has been agreed with private sector banks and development organisations, he said.

“The beauty of the SIP [programme] is that it has very little to do with Finance Minister Tito Mboweni’s medium term budget because the bulk of that financing falls outside the national budget,” he said.

October barometer

Botha said work on the projects should start before the end of October, or at the very least tenders should have been issued in this time.

He said the priority being assigned to these projects is directly related to the urgent need for employment creation and economic revival following the havoc caused by the coronavirus crisis.

“Construction is the most labour-intensive sector in the economy and the high priority that has been assigned to affordable housing projects has the potential to re-energise a pervasive supply chain that is not reliant on imports, with value being added by domestic businesses,” he said.

Possible problem …

Botha warned that dysfunctional municipalities need to be resuscitated “very quickly”.

“There are all kinds of things that the municipality must approve. They are part of the equation and if the municipality is either dysfunctional or bankrupt or incompetent or a combination of those, then you have a huge obstacle,” he said.

David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, said the outlook for the civil industry largely hinges on the efficacy of the government’s stimulus efforts, adding that Industry Insight remains sceptical about this.

Metelerkamp said the outlook for the building industry remains bleak, with the worst economic crisis since the late 1920s hammering private sector demand for housing as well as commercial and industrial space.

However, Botha believes the lower interest rates will be a huge incentive for building activity, adding that many people will be spending money to transform a part of their house into a home office because they have been working from home since the initial Covid-19 lockdown.

Botha highlighted that hardware sales in June were 4% higher than in June 2019.

Common sense indicator

“These small do-it-yourself guys are having a field day and add to that the 51 SIP mega projects, then my common sense tells me that construction is on the way up and looking good in future,” he said.

Botha said it was predictable that the ACI would drop to well below the level of 100 due to the lockdown regulations imposed between April and June.

He said the construction sector temporarily almost ground to a halt during the lockdown, with April recording insignificant levels of activity for every key indicator relevant to construction.

Read: Sanral ready to implement R30bn worth of construction projects

Botha said construction activity in South Africa followed the sharp downward trend of virtually every other sector – but that the GDP figures for the second quarter released by Statistics SA this week indicated that construction fared the worst of any sector, declining by more than 30% compared to the same quarter in 2019.

For the economy as a whole, the nominal decline in GDP amounted to 14.8% year on year.

Botha attributed the severe impact on the sector to several factors, including the very strict lockdown regulations and the fact that the construction sector is very reliant – and much more so than other sectors – on approvals from various public sector agencies, especially municipalities.

The value of building plans passed dropped by 73.1% in the second quarter compared to the same quarter of 2019 while the value of buildings completed plunged by 90.5% in the same period.

Botha attributed this to workers being loath to return to work because of fears about Covid-19 and the fact municipalities, unlike the private sector, did not apply the ‘no work, no pay’ principle during lockdown.

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I find it hard to agree with Mr Botha on this.

The construction industry was in dire straits pre-COVID, with delistings abound and the construction mafia doing their racketeering thang. If he thinks the mafia will suddenly become cooperative during desperate times and allow commercial projects to get off the ground unhindered… well, I have this here unbuilt bridge to sell him.

Furthermore he seems to have a reductionist’s understanding of interest rates, and why they are low right now:

“However, Botha believes the lower interest rates will be a huge incentive for building activity, adding that many people will be spending money to transform a part of their house into a home office… [snip]”.

Businesses and individuals still need to be able to borrow at those low low rates. Which is difficult to do if your pre-COVID balance sheet looked like downtown-Aleppo to begin with.

“In addition, these projects have the necessary sovereign guarantees…”

And the state is technically bankrupt, with a tax collection shortfall of hundreds of billions.

Correct me if I’m wrong, but it’s very much possible to invest in the ACI, no? And if mr Botha works as an economist for the ACI (implying that he’s not indepedent), then he’d have an incentive to wax lyrical about the rosy future for construction in SA, no?

I see that some corrupt contract companies won big PPE tenders in KZN…

What are construction companies, like Enza Construction, doing bidding on PPE???

“Durban – KZN Premier Sihle Zikalala released the names, identity numbers and race groups of the directors of companies that benefited from the more than R2 billion Covid-19 provincial expenditure.

Five companies were paid R833.8 million or 41.6% of the overall amount.

Of the five companies, GVK-Siya Zama Building Contractors, whose director is listed as Nasser Mogamat Gamieldien, was given a contract worth R311.6m, followed by RGZ Projects owned by Gugulethu Reginald Zondo, who received R163.7m.

Logan Medical and Surgical, whose owner and director is listed as Vimla Naidoo, was given R122m, with Leomat JJS JV, owned and directed by Arnaldo Corbella, getting R121.9m, while Enza Construction, which has Mark Rowan Crowie listed as its director, got R114.6m.

The latest report did not detail if any of the companies or individuals were being probed over allegations of corruption or price gouging, allegations that have encompassed South Africa’s emergency Covid-19 expenditure and that in the province.

Zikalala said the largest chunk of the spend went to “African-owned companies”, which scored contracts worth R810.2m, split between 235 businesses.

Indian-owned companies accounted for 29.52%. The coloured and Asian communities received 0.51% and 0.46% respectively.

R17.7m, or 0.84% of the Covid-19 spend, went to companies for which the government had no details, Zikalala admitted, adding that the matter was being probed further.

Other numbers mentioned included that 35%, or R687m, was spent on majority women-owned companies, while 15%, or R310m, was spent on majority youth-owned (35 years and under) companies.

“We want to reiterate as we did with the first Covid-19 Procurement Disclosure Report, this report is not meant to pass judgement on the process, on anyone or any company that was awarded a contract,” said Zikalala.

“We are releasing the information merely to account and be transparent to our people. Should we nd, at a later stage, that there was something untoward in the awarding of any of the contracts, we will not hesitate to act.”

Zikalala would not be drawn into answering why the public should believe the latest anti-corruption and accountability drive, as this was not the first time investigations had been done into allegations of corruption and reports released that were not acted on.

He said that government was unable to provide the same detail contained in the latest report for municipalities as they used different reporting systems. The National Treasury was in the process of streamlining reporting formats that would enable the extraction of director and owners details, he said.

“I must stress that we do this of our own accord. We have not been compelled or pushed by anyone or by any circumstance. We are merely driven by the desire to honour the contract we have with the people of this province.”

The Special Investigating Unit (SIU) is probing 658 contracts countrywide, worth just over R5bn. In KZN, the SIU has confirmed that it is probing:

1. 57 personal protective equipment (PPE) contracts in the provincial Education Department valued at R492.6m.

2. Four contracts for the procurement of blankets by the Department of Social Development (DSD) to the value of R22.4m.

3. 18 contracts for the procurement of PPE by the Department of Social Development to the value of R 21.2m. The investigations are set to be completed within three months.

Lifestyle Audits

Zikalala also touched on the subject of the much-vaunted lifestyle audits to be conducted within the province, as he did with the release of the first report.

The State Security Agency and Sars had been approached, he said, to assist with the task of auditing executive council members, senior government officials and all supply chain management officials.

The “process” was in motion, said Zikalala, but he provided no dates.

Reaction

Opposition parties said they did not believe the new-found drive towards accountability and transparency was “genuine”.

The IFP and DA said that Zikalala was avoiding presenting any of the reports to the Office of the Premier Portfolio Committee in the provincial legislature where they could be further interrogated, but that he was keen to disclose them to the media.

Zikalala’s political opponents told The Mercury that all too often there was insufficient follow-up in holding those accused of benefiting irregularly from public funds to account, or of clearing those accused of wrongdoing.

As an example, the second biggest beneficiary of the Covid-19 contracts, RGZ Projects, has contracts worth R163.7m with the provincial Health Department for the upgrading and alterations to wards at Scottburgh’s GJ Crookes Hospital.

In a 2010 forensic report conducted by eThekwini Municipality, known as the Ngubane Report, the company was accused of housing contract irregularities.

In order to obtain clarity on the outcomes of the allegations, now more than a decade old, The Mercury last week sent detailed questions to both the eThekwini metro and the KZN Department of Health (as the giver of the contract, asking about due diligence).

Both failed to respond.

The owner of RGZ Projects, Reginald Zondo, did however speak to The Mercury.

He said he had never been accused of wrongdoing or interviewed by anyone involved in compiling the Ngubane Report, nor had he been approached by other investigators after the report was released.

In another report, the Department of Co-operative Governance and Traditional Affairs oversaw and then in February 2012 released the Manase Report, which investigated widespread corruption in eThekwini metro.

It implicated companies, senior managers and sitting councillors.

The report, among its many findings, provided evidence that former eThekwini mayor Obed Mlaba was found to have unlawfully influenced a R3bn tender involving a waste-to-energy landfill site in the Bisasar Road landfill Site of Clare Hills.

It is understood that many of those publicly implicated were never further investigated or publicly cleared.

IFP president Velenkosini Hlabisa said that Zikalala and his administration were trying to “create the impression” that they were dealing with corruption.

“Soon they will deteriorate back to their old ways,” he said. “None of what the premier has disclosed to the media over the last month has come before the portfolio committee.

“He is neglecting his duty to account before the legislature.”

Hlabisa said the ANC was unable to be “truly decisive against corruption” if it could not remove sitting MPL and former eThekwini mayor Zandile Gumede from the legislature while she faced criminal charges for her alleged involvement in a R430m Durban Solid Waste tender racket.

Zwakele Mncwango, who leads the DA in the province, said Zikalala needed to be “accountable to the portfolio committee” where he could be asked “specific questions”.

“The premier is trying to fool the public. In most cases when it is a comrade implicated in corruption, the ANC will cover for them,” he said.”

The Mercury

Easy to show growth if your base is almost zero…

End of comments.

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