Challenges for Southern African Construction companies

Africa is developing fast, but unfortunately, not everyone in the construction industry is smiling. In particular, South Africa’s construction and engineering sector is in a bad cycle, with an index trading at 69% lower than in 2009.

Some grim statistics

PwC’s third edition of its “SA Construction” study looked at nine top construction companies listed on the JSE, for the financial year ending in June 2015. Eight of these nine companies showed a decrease in market capitalisation. Overall, market capitalisation decreased by 38%, compared to the previous year’s study. There was a further 9% decline in the four months that followed.

This is worrying news, given how crucial the construction industry is to South Africa’s economy. It contributes a large part of GNP, plays a key role in development and contributes substantially to the country’s GDP. Then there’s the labour market to consider – according to Stats SA, the South African construction sector employs more than 1.4 million people.

The challenges

There are several challenges facing construction in South Africa at present.

The struggling rand

Firstly, there are the looming economic issues. The country’s slow economic growth makes for a sluggish construction sector, and in 2015 we were hit by serious knocks to the rand in relation to the dollar.

As the value of the rand decreases, project costs rise, as does the price of construction materials like steel and oil. Commodity markets are affected, with subsequent decreases in revenue being felt by major construction firms, such as Murray & Roberts and Group Five.

A poor-performing currency means plummeting profitability for construction firms. When economic growth stalls, so does the demand for construction work. If the demand for new construction work remains poor in 2016, it will pose a serious challenge.

Corruption

Then there’s the issue of corruption, with companies paying governmental departments to have their tenders fast-tracked, and cartels that limit healthy competition on the scene. Collusive tendering in the public sector prevents consideration of competitively priced bids from varied players and undermines the reputation of the industry.

Eskom woes

Power concerns abound, not just politically but in terms of actual energy. Eskom’s power problems alone can have devastating consequences for construction projects, causing costly delays.There was also not enough public sector expenditure for, anddelays in, energy projects likeEskom’s Medupi and Kusile power stations.

In March 2015, construction on Eskom’s 4,800 MW Medupi coal-fired power station was halted when workers downed tools – but it was just one of many obstacles and delays. In the long run, power shortages may force construction companies to look into increased mechanisation, the future effects of which remain to be seen.

Labour shortages

Apart from added safety concerns, which mean more forking outon insurance, there’s the very real problem of a shortage of skilled labour. There are few trained artisans, and few coming into the industry within the younger generations, and staffed skilled at supervision at the first level are also in short supply.

Some contractors have sought skills elsewhere, only to be met with high salary demands – and staff costs already contribute 29% of total operating costs.

Political and union unrest is also putting severe pressure on the mining industry, with industrial action increasingly making headlines. Post-Marikana, lending firms have also shown less confidence in the mining industry, which has a direct impact on construction and its costs.

All in all, there are many factors that government, analysts, investors and construction companies will be keeping an eye on this year.

On the bright side

There is some hope on the horizon. Larger contractors have launched skills development schemes to meet skills demands, and they’re being nudged by government to partner with their Presidential Infrastructure Co-ordinating Commission to coordinate and increase their training efforts.

The increase in social infrastructure spend by government, including investment in housing, schools and the building of roads, brings some hope for near-future work in South Africa.

Others are looking beyond the domestic market, to infrastructure opportunities on the rest of the continent and in Australasia, to bring in revenue. There is growing demand for infrastructure and services in Africa, and local construction firms are advised to focus on intra-African trade and export-related opportunities.

The government’s National Development Plan holds promise for future growth, and there are also positive future highpoints, such as the Commonwealth Games schedules for 2022, which will require a host of projects. Those in construction should prepare to manage their short-term liquidity issues in order to take on such projects to meet South Africa’s growth demands.

 

KH Plant Rsa