South Africa’s building and construction industries are facing an extremely tough year ahead, according to most analysts, commentators and industry experts. One big industry player late last year even assessed that the country is facing its worst building and construction recession in 40 years.

In December last year, the trade union Solidarity said matters currently looked bleak for the construction sector. This industry lost 12 000 job opportunities over the past year and 61 000 over the past two years.

Solidarity had warned earlier that the job losses in this sector would continue in 2011 if planned construction projects were not undertaken.

According to Statistics South Africa, formal employment in the construction sector dropped 10.9% in the first quarter of 2010, compared with the same period in 2009.

The federation of builders, Master Builders South Africa (MBSA), attributed the job losses to “completion of construction projects in that period” – several of which were Fifa Soccer World Cup related.

MBSA president Jean-Marie Talbot recently noted that the sector is “in crisis” and, forecasting further job losses in 2011, called for “an urgent building crisis summit”.

The building sector downturn, which lagged behind the rest of the economy, came at the time of the completion of most large public projects, including World Cup-related work.

After three to four boom years, the industry has built up too much capacity for the current levels of available work. As a result, there is significant price pressure as firms undercut each other to win contracts.

In addition, overcapacity has pushed employment lower. The industry reported an annual decrease of 12 000 employees and a third-quarter 2010 decrease of 7 000 or 1.7%.

Wage increases, meanwhile, have risen well in excess of inflation. The Reserve Bank’s quarterly bulletin released in January shows that at an average of 29.9%, the construction sector awarded the highest wage increases.

The Bank expects inflation to average 4.3% in 2010.

Cement manufacturer Pretoria Portland Cement (PPC), which foresaw the worst recession in the industry in 40 years, reported a dramatic fall in demand since the World Cup and said it has little idea when the sector will bounce back.

Compounding the severity of the outlook for the sector is the continuing uncertainty over the government’s nearly R900-billion infrastructure programme.

Reporting three successive years of declining cement demand in November last year, PPC’s chief executive Paul Stuiver said construction activity in Gauteng is 50% down since the World Cup, and 40% down in the Western Cape. Sales in the group’s main markets, South Africa and Botswana, fell by 13% during 2010 on top of a drop of 10% during 2009.

Judging by the gloom coming from the industry, South Africa’s fixed investment activity is fast hitting rock bottom. Gross fixed capital formation, a measure of total investment activity, dropped to 0.9% during the third quarter of 2010, from 1.3% previously.

Private-sector activity normally comprises two-thirds of spending, but it has suffered the most.

Property expert, Rode and Associates’ Erwin Rode, does not expect much to happen in the residential property market.

But, whereas these property prices probably will not increase, the office rental market has started to pick up: “I don’t expect fireworks, but a moderate increase in rentals is possible,” said Rode.

“The construction industry is crossing deep waters and things are difficult. We have idle capacity and an oversupply of most types of property space. This oversupply must first be taken up (before growth returns).

“It is going to be one of the toughest years for the building industry,” he said.

There are other areas of concern. Little progress has been made on public-private partnerships, including much-publicised hospital and prison projects. Provincial and municipal spending, hampered by funding and skills shortages, has come to a virtual standstill, worsening the state of existing infrastructure.

The apparent spending paralysis of critical government departments such as Human Settlements has contributed to the current freeze in investment, raising further concerns about the state of investment in South Africa.

According to a report from Business Report in early December last year, the First National Bank third-quarter 2010 civil construction index dipped to 28 points from 33 points in the second quarter, although it was above the cyclical low of 25 points seen in the first quarter. A score above 50 indicates optimism and below 50 shows a pessimistic outlook.

The low volume of work can be attributed to the fact that many projects were completed before the World Cup.

Since then, few new projects have been started due to a variety of constraints at local government level, some public corporations and in the private sector.

Certain local governments appear to be delaying new projects because their income from rates and taxes declined due to the recession, while capital expenditure budgets seem to have been reduced to cover current expenditure.

Public corporations such as Eskom and Transnet had to defer some projects partly because international capital markets became extremely tight after the global crisis, Business Report stated at the time.

Some hope

However, the industry is not completely without hope. While the government’s pledge to invest in public infrastructure – valued at R811bn over three years – has yet to materialise, there are pockets of growth on which the sector is keeping a keen eye.

Most of the activity is expected to take place outside South Africa’s borders.

Using The New Partnership for Africa’s Development (Nepad) as a springboard, African leaders want to drive a series of intercontinental infrastructure projects to boost regional trade and development.

Proposed projects are in the power, transport, information and communication technology, and water sectors, and stretch across the continent. They include a World Bank-funded US$5.5-billion solar power project in North Africa, and a $6-billion proposed highway between Malawi
and Mozambique.

Africa requires annual investment in infrastructure of $93bn, but its funding gap is $31bn. And inefficiencies at borders and ports, decaying road and rail infrastructure and power supply concerns continue to hamper investments.

At a recent Nepad meeting of African heads of agencies and infrastructure experts in Pretoria, President Jacob Zuma said: “We have done enough planning on the continent... either we [leave] things as they are and let Africa trail behind forever, or we do something about our infrastructure in order to develop like others.”

The construction sector will hope that President Zuma’s comments will kick-start stalled projects. But in the case of most large projects, even once they do get off the ground, it will be years before construction begins.

The outlook is mixed. In the short term, analysts expect capacity to shrink even further. Companies have already downsized to match the available work, and may continue to do so. Though the employment cycle has turned, construction and manufacturing may still shed jobs going into 2011.

Looking beyond that, private-sector investment is expected to pick up. In particular, it is foreseen that mining activity will yield work in Africa in time to come.

Though an increase in government work on the continent is foreseen, most contractors will still chase private clients, which have a better record of payment.

The backlog in public-sector investment has worsened, but there are positive developments. Government guarantees, and funding from the Development Bank of Southern Africa, may help Eskom out of its funding woes.

It has given the industry some confidence that Eskom will be able to raise the funds it requires to complete its multibillion-rand capital expansion programme.

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