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Jan 30, 2006

Construction economy set for 9,42% growth

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Obscured by record car sales and booming house prices, something else happened last year that was out of the ordinary.

The South African civil engineering sector grew its turnover by 8%, according to a preliminary estimate by South African Federation of Civil Engineering Contractors (Safcec) economist Pierre Blaauw.

This follows industry turnover contracting by 5% in 2004 - something which did not seem exceptional for a sector that had spent the previous three decades nursing its wounds as it continued to decline.

Blaauw has even better news for the industry in 2006: It's not about to run out of go-juice. Civil engineering turnover growth is forecast at 9,42% for the next twelve months.

Expectations are that this trend will continue in the run-up to 2010, which by now has become more than merely the date the soccer World Cup will be held in South Africa.

Instead, it is expected to be the peak in an expected infrastructural spending cycle which will see much more than transport and sport facilities arise.

It is as if South Africa has suddenly awoken from a Rip-van-Winkle-like infrastructural slumber, with considerable non-World-Cup-related infrastructure also striving for quick advances, if not completion in the next five years, such as the Coega development, upgrades to Spoornet's rail network, and improvements at many ports.

Other projects waiting in the pipe-line include new power-generation capacity for Eskom, proposed new highways, the R20-billion-plus Gautrain project, as well as several water projects.

The lack of adequate infrastructure is currently serving as an economic straitjacket.

One example is that coal- and iron-ore-miners could have exported more of their respective commodities in recent years had the rail and port facilities allowed it.

Blaauw says infrastructure spending has not kept up with the more than 48 quarters of consecutive economic growth in South Africa.

“These quarters of growth have now finally allowed for infrastructure spending to happen.

“There is currently severe stress on delivery. The country is running into capacity constraints and the construction industry will have to answer.”

The question is, though, whether the industry can do so after spending 30 years on the backfoot.

Hey, big spender
Public Enterprises Minister Alex Erwin, at the end of last year, placed a bold figure on the table. He said the public sector would invest R370-billion in the next five years in South Africa's largest investment programme ever.

If he took only the initial current capital-expenditure estimates of Eskom and Transnet into account, Erwin said the capital programme would involve expenditure of R27-billion in the construction industry, particularly civil engineering, which involves large-scale building projects.

President Thabo Mbeki has since topped this with a figure of R400-billion.

But, despite Erwin's and Mbeki's announcements, some commentators remain sceptical. Government has for many successive years promised to open its purse wider - something which is only now starting to happen on the scale the civil engineering industry had hoped for.

Spoornet's upgrades, for example, have been religiously announced since the beginning of this decade. So far, very little has materialised.

South African Institution of Civil Engineering (SAICE) executive director Dawie Botha says he believes the money will come; the question, though, remains “When?”.

He also warns that government probably does not have the institutional capacity to spend the R370-billion as fast as it would like to.

“They are probably too optimistic. It is too much, too fast.”

As to whether the construction industry is able to produce the volume of work required, Botha says the hard hats have what it takes.

“We can do it, but the decision makers will have to plan carefully so everything does not happen at once, which may create a problem.”

He notes that, because of the long-term decline the industry has suffered, construction companies have downsized in terms of machinery, staff and administrative capabilities, all of which have now to be built up again. Secondary industries, such as brickmaking and cement manufacturing, are in the same boat.

Companies also still remain somewhat sceptical of the urgency in gearing up for the promised boom, because of the fact that government capital spending has been postponed so many times before.

Blaauw notes that the civil engineering industry does not expect much work from sometimes struggling local and provincial governments in the next few years.

“Here, we don't expect miracles; if there will be any work, it will be marginal. “We are hoping for parastatal spending to come through, and, we believe, it will, as there is an increased sense of urgency from government regarding the need for infrastructure.”

The skills mantra
Botha believes the construction industry and the civil engineering profession may have to import some skills to facilitate implementation capacity.

He says training and education form a vital element of the industry's success going forward, but that it will remain inevitable that some specialised skills will be imported, such as tunnel experts for the Gautrain project, with the skilled but small international been-there-done-that crowd literally globe-trotting from project to project.

The publication Numbers and Needs, written by past SAICE president Allyson Lawless, indicates that South Africa will need between 3 000 and 6 000 additional civil engineers, technologists and technicians over the next ten years, depending on whether all the planned projects are run concurrently.

The need for skills development is overwhelming, notes Botha.

One Gauteng municipality, for example, requires 25 engineers, but has only seven on its payroll.

In response to skills constraints, Lawless and SAICE have come up with a rather ingenious solution.

They are recruiting retired civil engineers to work with students from universities of technology (technikons), who are struggling to get experiential training, and graduates who need experience after they have qualified.

“It is envisaged that experienced engineers and teams of students will form units that will work in certain local authorities,” explains Botha.

“We have compiled a database of between 80 and 100 retired engineers who are willing to assist in this manner.

“We also have a database of students who are looking for work.”

Another SAICE intervention is by way of administering bursaries that the local government sector education and training authority is providing for technicians to become technologists in the local authority environment. This amounts to R500 000 a year, for a five-year period. Capacity-building programmes to enhance informed decision making by local authority councillors has also been rolled out by the institution.

The Stellenbosch-based think-tank, the Bureau for Economic Research (BER), indicates in its building and construction survey for the fourth quarter of 2005 that 92% of nonresidential contractors and civil engineering firms report that they are experiencing a shortage of skilled labour.

“Anecdotal evidence from the building industry indicates that the unavailability of labour is seriously slowing the pace of building activity, very often leading to late completions and consequent penalties having to be paid by contractors,” says report author Charles Martin.

An additional complication construction companies have to consider is the rising cost of building materials, as well as shortages of building materials, such as bricks and cement.

The cumulative result of all these elements is that building costs will rise more rapidly over the short term, says Martin.

Just to put the possible capacity constraints in perspective with one example: in August last year, Group Five CEO Mike Lomas noted that his company had a R4-billion order book, out of what he saw as a capacity of R5,45-billion.

Prior to 2004, this spare capacity would have sufficed, but the growth of contracts on the market, and government's promising there is more to come, has now prompted Group Five to shop abroad for people with big-project skills.

A black Murray & Roberts
South African Construction Industry Development Board (CIDB) CEO Spencer Hodgson believes that, in the context of growing demand, there is ample space for another large South African construction firm such as Murray & Roberts - with the potential for black ownership.

The CIDB was formed in 2001 to increase the construction industry's delivery capability and to facilitate transformation.

The CIDB has 6 000 contractors on its books so far, through a pro-cess by which it grades contractors according to capacity.

One of the larger empowerment firms on this database is Ilima Construction, headed by CEO Tembalikayise Lupepe.

Lupepe is a former dentist who realised four years ago that a new South Africa would require new infrastructure, and that his entrepreneurial spirit was better suited to the construction industry than to medicine.

“I realised there would come a crunch time, and this seems to be it.”

According to the CIDB, his company is able to tender for contracts of up to R100-million.

Lupepe believes less in a new large black-owned construction firm than in a black Murray & Roberts.

“It is easier for one of the existing companies, which already have the critical mass of qualified people, as well as the plant and equipment, to become a majority black-owned company, rather than to start from scratch.”

He adds that, during this growth period, established construction companies must also make use of empowerment companies, which often have spare capacity available.

This would ensure that the larger firms have even more capacity for infrastructure delivery.

It is problematic, notes Lupepe, that, as the industry finally approaches a boom period, many black-owned construction firms lack the capacity to take on big projects themselves, “which is why I emphasise the need for partnerships”.

“Our country definitely needs black companies to participate in the infrastructure rollout.”

Lupepe agrees with Botha that it would be necessary for government to stagger its projects carefully, to ensure the local industry has the ability to deliver on as much of it as possible.

Group Five last year signed an empowerment deal with the Mvelaphanda Group and Ilima - jointly referred to as IlimaMvela - which will hold 21,6% of the long-established construction group.

Ilima Construction also currently forms part of the Strategic Partnership Group, which, in turn, is a member of the Bombela consortium, which will build the Gautrain rapid-rail system.

Another project in which Ilima is involved is the construction of 1 000 social housing units (social housing is one rung up from low-cost housing) in the North West, in partnership with Group Five.

Ilima is also a member of a consortium bidding as an independent power producer to build two new coal-fired power stations in Kwazulu-Natal (750 MW) and Coega (250 MW). This project is managed by the Department of Minerals and Energy.

Lupepe says these stations should be up and running by 2009.

Ilima is also part of a bid to build the about R850-million new Department of Foreign Affairs campus in Pretoria.

Four steps to a healthier industry
Hodgson says a 2004 CIDB report noted that the industry would need to double its output over the next ten years to meet demand.

“This now seems a conservative estimate. This increased rate of fixed investment is something the industry has not seen in 25 years.

“The growth that government envisaged a few years ago - but that didn't happen - is now happening.”

Hodgson says several proposals under review by the CIDB and government are aimed at strengthening existing government initiatives to ensure that infrastructure demand is met. He outlines four of these.

“The construction industry needs a massive intervention in terms of skills. In 1975, in the last upcycle, it had 33 000 apprenticeships. Last year this figure was 1 500.”

Hodgson says the country needs an agency to facilitate the placement and training of artisans, providing companies with access to a pool of growing skills.

The second proposal is that infrastructure maintenance must be put forward as a critical construction industry sector with maintenance budgets linked to capital expenditure and a dedicated budget allocation of, say, 5% of all fixed investment.

“Maintenance could create immense black economic-empowerment opportunities and sustainable local capacity,” says Hodgson.

The third proposal is for the construction industry to develop the small and medium-sized enter-prise sector, with the assistance of the Department of Trade and Industry.

Lastly, Hodgson suggests that existing programmes to deal with public-sector delivery constraints and perpetual underspending on infrastructure would be strengthened by measures to reward performance. These would include the linking of infrastructure spend to performance bonuses and the allocation of additional budget resources to public-sector agencies that are able to demonstrate effective spending of capital and maintenance budgets.

After 30 years of tight profit margins, the South African construction industry is weary of irrational exuberance - perhaps, it has just learned the hard way that what goes up, must come down.

Thus, despite all the positive talk, industry role-players stress the need for post-peak planning.

Botha says the good times may last six to ten years. What is important, he emphasises, is that industry does not again contract after this period.

“This is when the maintenance cycle must kick in. Our culture of maintenance must improve.”

For Lupepe, it is important that the current times and favourable conditions foster robust black construction companies.

“This has to happen before any dip occurs in the growth cycle.”

Blaauw believes the industry can count on a “prosperous few years”, though.

“We believe the industry has embarked on a longer-term upward trend. Even though it may still fluctuate, it will do so on the upside.”

Edited by: Irma Venter
Creamer Media Senior Deputy Editor

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