Building on uncertain economic foundations {writer: Piet Coetzer}

The South African Federation of Civil Engineering Contractors (Safcec) expects that the engineering and construction industry in the country will decline by 10% during 2010.

While the construction of infrastructure and amenities associated with the 2010 Fifa Soccer World Cup are all now fast approaching final completion, the industry will remain largely dependent on government infrastructure.

While it is not all doom and gloom, indications are that the construction and related industries in South Africa are facing an uncertain short- to medium period. There is very broad consensus that it will take a while before all the ramifications of the financial crisis of 2008/2009 are behind the economy and that any recovery will be slow and even quite bumpy.

All indications are that the well-being of the industry will remain largely in the hands of the government and its infrastructure development plans on the one hand, and capacity expansion by state enterprises such as Eskom.

Late last year, research and credit insurance company Coface South Africa reported that the government’s spending on infrastructure development accounts for more than 50% of the construction industry market.

Sector splits

In an analysis of the construction industry published in October 2009, the company has split the industry into two sectors, infrastructure construction and residential construction, because each has been affected differently by the economic downturn.

Industry analyst Wayne Basson said that the R787-billion infrastructure spend has had a positive effect on the construction industry and, because of the huge infrastructure backlog, large construction companies have secured contracts to sustain them past the demand created by the 2010 World Cup.

The performance of these companies will benefit the economy over the next 12 months and the continued demand will assist in job creation.

“The residential property market is in decline, which is the result of many factors.

“Banks have become restrictive in their credit lending, with bonds of less 100% now being granted, and with additional restrictions such as the National Credit Act compliance requirements,” added Basson.

Industry confidence down

In December last year, Safcec said that the current industry confidence was below 50 out of 100, underscoring a pessimistic outlook over the short term within the engineering and construction industry.

“At the moment, competition for tendering is heating up and companies complain of a predatory mindset, which will increase the risk for contractors engaging in maverick pricing and very possibly lead to the demise of contractors over the next two years,” said Safcec economist, Pierre Blaauw.

This was in stark contrast to double-digit real growth from 2005 to 2008 within the South African civil contracting industry on the back of the government’s infrastructure investment, the federation said.

“In 2009 we expect around 5% real growth. Given the high base of activity during 2008/9 and the lack of real prospects for contracts of the same order of magnitude to be awarded during 2010, the expectation is that industry turnover will decrease in 2010,” Blaauw said.

The economist said that the global financial crisis was in part to blame for this situation, as large clients faced the brunt of the lack of liquidity as well as a decline in demand, particularly with Eskom and Transnet, due to slower economic growth.

“I say in part because 38% of the Medium Term Expenditure Framework (MTEF) budget has been allocated to provincial and local government, which seems to be struggling with delivery and wrought with financial difficulties,” Blaauw added.

Looking ahead, Safcec said it did not expect activity levels to drop to pre-2000 levels.

“Most likely there will be volatility at a more ‘normalised’ level. It is also anticipated that infrastructure requirements hold great promise for the industry over the medium- to long term, with the probability that current levels will once again be achieved and surpassed at the end of 2012 to 2013,” he said.

About the property market, which has a very strong influence on the well-being of the construction industry, Alliance Group in early January warned that the “property market, still burdened by debt, faces a long, hard slog; in fact, our view is that the property market is in a period of a slow, weak and dull recovery.”

Property consultants Rode & Associates said that the outlook for building activity looked bleak, as building input costs and tender prices continued to decelerate.

“In fact, contractors are currently being forced to trim their profit margins so much that the Bureau for Economic Research Confidence Index is expected to have contracted by 2% in the third quarter of 2009, while the demand for labour, materials, machinery and equipment has also faded to such an extent that building-input prices are expected to have contracted by about 1%,” said chief executive officer, Erwin Rode.