Confidence takes a dip, but there are still opportunities {writer: Roxanne Sonnenberg}

The 2010 Fifa Soccer World Cup tournament, with all major projects from new stadiums to huge road infrastructure projects associated with it, was a major boom for the South African construction industry and is the main reason it could largely side-step the 2008/2009 recession.

Looking forward, however, not all analysts seem to read the cards the same – some are more optimistic than others.

With the conclusions of projects related to the preparation of the World Cup, some analysts have said that 2010 remains a tough year for the construction industry.

This is mainly due to the slow economic growth within industry which spans a period of 12 to 24 months attributed to lengthy planning cycles. This could mean that any type of improvement could only be viewed in 2011, perhaps even 2012.

South Africa’s gross domestic product rose by 0.9% in the third quarter of 2009, compared to the second quarter’s -2.8%, thus breaking away from the first recession the country has experienced in 17 years.

There are signs of hope and improvement. Provincial governments have allocated at least R44.6 billion over a proposed period of three years. During this time, the focus will be solely on infrastructure and housing while road projects remain under way.

Analysts state that South Africa has very little faith in its construction industry, as many market players remain pessimistic about future prospects following the completion of projects related to the World Cup.

However, with South Africa’s large electricity expansion programme under way, combined with other infrastructure projects on roads and railroads, construction should be kept busy long after the final World Cup whistle has blown.

The Construction Industry Development Board (Cidb) has recently released its Construction Industry Indicators (CII) survey results for 2009. The Cidb annually conducts the CII survey to gauge the long-term trends in industry.

The survey specifically examines client satisfaction, contractor satisfaction, profitability and payment delays, procurement indicators, and heath and safety.

The most significant disclosure has been that of payment delays within the industry. Results indicate that a staggering 42% of contractors are paid on time while at least 58% of payments to contractors were made within 30 days or later after invoicing.

The survey shows a significantly high delay in payments during 2009 in the private sector and national departments, suggesting that metropolitan councils and private partnerships were the best payers.

A reason for delayed payments can be attributed to corruption within government departments or simply bad invoicing.

Currently, the Western Cape boasts the highest percentage of projects paid within 30 days while the Northern Cape remains the lowest to be paid on time.

The Cidb has realised that payment delays are, in effect, killing small and medium sized enterprises. Despite not having any real control in the matter as payments are a contractual issue, the Board will effectively monitor the situation and report to the individual provincial premiers in order to improve the situation.

Survey results show that areas such as special work, mechanical work and electrical work respectively achieved a profit margin increase of at least 10%. Residential and non-residential building projects have proven to be the least profitable.

With regard to client and contractor satisfaction, the survey indicates that clients indeed were satisfied with contractors during 2009. However, clients indicated dissatisfaction or neutrality with contractor performance in 18% of projects surveyed.

Contractors were satisfied with employers and agents. The worst performing employers are the Gauteng national and provincial departments as well as the Northern Cape metropolitan councils.

One other aspect that the survey highlights is the fact that only 85% of projects start on time while 84% finish on time.

All things considered, the construction industry still remains on good footing despite coming under immense pressure, particularly in the housing sector.

The First National Bank Building Confidence Index (FNB BCI) released results conducted from a survey that aims to look at major role-players and suppliers involved in the building industry including architects, quantity surveyors, sub-contractors and retail merchants and manufacturers of building materials.

The survey indicated that confidence in the residential contracts has dropped marginally from 26 in the first quarter of 2010 to 21 in the second quarter of the same year. Respondents in the survey indicated that growth in this area remains slow and unchanged during the second quarter of this year. Overall business conditions are tough and new work remains scarce.

The survey suggests that non-residential building is likely to remain under pressure for some time ahead.

However, FNB’s quarterly report on the state of the civil construction industry in the country, released during the last week of June, indicated that 67% of respondents regarded business conditions as unsatisfactory.

According to Cees Bruggemans, FNB’s chief economist, the survey clearly painted a picture of an industry under siege, experiencing rather unfavourable business conditions at present.

Not only was construction activity declining, but management skills deficiency and other constraints at provincial and local government level were leading to underspending on budgeted projects. Margins have also come under pressure due to the scarcity of new projects, which adversely affected the growth in the overall profitability of businesses that have participated in the survey, said Bruggemans.

KPMG engineering and construction practice international sector leader Geno Armstrong says that there is a perception that the global financial crisis has devastated the construction industry; however, many companies are beginning to view the impact on businesses as a time to become leaner and be well prepared for success.

According to transport Minister Sbu Ndebele, some construction workers retrenched after the completion of World Cup projects will be absorbed to build roads, bridges and dams worth R700bn over the next three years.

With the assistance of Chinese and German specialists, plans in the pipeline include the construction of a high-speed train that will commute between Johannesburg and Durban as well as a train commuting between Pietermaritzburg and Durban.

With smaller companies now furiously bidding for fewer construction contracts, many industry players must start to believe that the fruits of their labour will only start to kick in during 2011. Activity is not really confined to South Africa, but neighbouring southern African countries as well.

Opportunities to expand dams and water projects are both inside and outside South Africa. Mozambique, for example, has experienced a growth in its building market. The 2011 financial year presents a strong continued pressure as a result of increased competition.

While a number of large-scale infrastructure and marine projects are still available in South Africa, many companies are looking to cross-border markets for higher margin projects, in an attempt to intensify competition. Though there remain good opportunities within the local market, targeting road contracts within Africa will prove to sustain momentum in the future.

The construction industry remains the largest employer in South Africa and is crucial for the economy. Statistics South Africa states that approximately 430 000 people were employed in the construction industry during 2009 in the third quarter.

This proves the construction industry to have a good track record for working in the public sector.

Looking ahead, there are certain factors that the industry must take into account. Firstly, the industry must examine all possible avenues for growth in the future; secondly, it should create the capacity for new avenues through recruiting the relevant talent or training of current employees.

It is likely that technologies will develop to address sustainability, energy efficiency and the effects on climate change. This will soon become a key growth area.

While most companies admit that being “green” will not translate to winning business, the lack of it could possibly cause the company to miss out on new business.

Because issues surrounding the Earth and environment are gaining more traction, the development of an environmentally sustainable approach would be a very wise move.

Though many companies foresee the industry sector taking 12 to 24 months to return to stable business levels, there remains a struggle to be more competitive in the industry.

Within South Africa, the hope is that its construction industry, more specifically its domestic demand, will begin to rise; and with the help and exposure that the 2010 Fifa Soccer World Cup has created, an increase in business interest and subsequently creating new opportunities.