Wednesday, January 26

Confidence in civil construction improves marginally


Confidence in the civil construction sector improved marginally in the third quarter of 2021, but more than 80% of those surveyed in the civil confidence index of the FNB-Bureau for Economic Research (BER) are not satisfied with the prevailing commercial conditions .

The index, which has been hovering around the 20-point mark since mid-2017, rose four points on a 100-point index to 17 in the third quarter.

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

The slowdown in activity and profitability and the persistently weak order book are of particular concern, FNB-BER said.

FNB Senior Economist Siphamandla Mkhwanazi said Tuesday that underlying indicators related to activity and profitability justify continued pessimism in the sector.

Mkhwanazi said the sustained low sentiment was supported by a slowdown in construction activity.

Competition in tenders decreased somewhat, but this was insufficient to offset the adverse effect of lower activity on profitability, which deteriorated and probably also “kept confidence in check”.

Demand

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

“While annual results for some larger companies revealed an improvement in national order books, this quarter’s survey results suggest that this is not the overall industry experience,” he said.

Mkhwanazi added that the civil construction sector is highly dependent on a struggling public sector and therefore the recent publication of the amendments to Annex 2 of the Energy Regulation Law, further progress towards project development. of renewable energy through the Independent Power Producer (IPP) program, and the preliminary version of the National Infrastructure Plan are welcome.

“However, this is only of value to contractors when the job is done. 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 ‘boost’

Pessimism in the civil construction industry is almost ingrained despite the fact that Public Works and Infrastructure Minister Patricia de Lille earlier this month argued that South Africa’s infrastructure campaign to revitalize the economy and create jobs is gaining momentum.

De Lille said that several projects introduced as part of the government’s Economic Recovery and Reconstruction Plan (ERRP) have started and are under construction and have provided an update on the status of various projects.

Read: SA’s Infrastructure Momentum ‘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 presenting and subsequently publishing the first tranche of 50 Integrated Strategic Projects (SIP) and 12 special projects that have been accelerated to stimulate the economy after Covid-19.

Read: First Post-Pandemic Recovery Infrastructure Projects Released

Where are the ‘shovel-ready’ projects?

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

“Investment in infrastructure is also an important signal to the economy that investment and expansion are happening, improving consumer and business confidence, leading to increased economic activity,” he said.

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

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

National Infrastructure Plan plagued by ‘decreasing capacity’

In a section on the state of corporate planning and capacity to deliver in 2021, the NIP 2050 said there is considerable evidence of declining capacity to plan, finance, acquire and implement critical network infrastructure.

He added that while there is also evidence of success, overall the aggregate figures show declining results that are not meeting 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 shortage of adequately prepared and bankable projects.

  • Significant under-spending against annual budgets, resulting in the five-year spending trajectory adjusting downward every year since 2017.

  • Significant costs and delays in the implementation of the identified projects.

  • Unintended consequences of regulations and instructions that are not sufficiently and timely controlled, such as those resulting in ‘mob’ style tactics to forcibly secure participation in infrastructure and eliminate unpredictable and harmful procurement practices .

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

Read: SA construction industry is in dire straits

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

Government spending problems

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

Read: Ramaphosa Accelerates Infrastructure Financing

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

He said weakening project flow and public sector spending has led many large civil construction companies to turn their attention to foreign contracts and / or survive in South Africa by diverting their business from construction.

“There is evidence of an unprecedented number of large contractors that have requested the rescue or liquidation of companies, attributed in large part to a combination of the lack of large government infrastructure contracts, late payments and the acceptance of problematic contracts. and at a loss.

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

“The value of publicly traded construction companies fell between 60% and 70% between 2008 and 2018, although a part of this may have been caused by the sale of companies to non-publicly traded black power entities. .

“There have also been some business failures and a significant emigration of skills abroad. Construction employment fell by around 35% between 2014 and 2019, ”he said.

Foreign companies may need to be called in for help

The NIP 2050 emphasized that the state infrastructure investment campaign will draw on a severely depleted delivery sector, which may result in further introduction of foreign companies to assist in the delivery of major projects.

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

“The rate at which this can happen depends substantially on the state’s ability to build confidence in the sector,” he said.

“This, in turn, will require a transparent and credible project portfolio and reformed procurement processes.”

Read: Post-Covid SA Building Requires Greater Vigor


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