https://www.engineeringnews.co.za

Significant drop in engineering industry confidence – survey

Cesa CEO Wally Mayne speaks on the state of the engineering industry. Video: Nicholas Boyd. Editing: Lionel da Silva

4th May 2015

By: Megan van Wyngaardt

Creamer Media Contributing Editor Online

  

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The level of satisfaction among South Africa’s engineering firms took a staggering tumble, falling from 87% in the first six months to 46% in the last six months of 2014, engineering body Consulting Engineers South Africa (Cesa) has revealed.

Cesa’s ‘Bi-Annual Economic and Capacity Survey June to December 2014’, also found that there was little hope for improvement this year, with confidence in the year ahead averaging about 50%.

Speaking to Engineering News Online at the release of the survey findings, Cesa CEO Wally Mayne noted that the 47% was far removed from the 96% the organisation had expected. “It’s a little bit like fortune telling - you judge by signs and trends and according to the trends; the infrastructure work output or work allocation should have increased.”

However, he noted that, paired with government’s budget constraints and reduced flow of projects, the outlook changed. “Our members receive about 60% of their work from government and if government does increase its budget allocation for infrastructure projects then [the current] dissatisfaction might reduce.

However, 40% of infrastructure spend came from the private sector, where investment was also decreasing as a result of a lack of confidence from international ratings agencies.

“I think, at best, the dissatisfaction will bottom out and then slowly pick up again, but it is a turnaround situation and I think the prospects for the infrastructure sector in South Africa over the next three years is pretty gloomy,” Mayne said, noting that the current satisfaction levels were at their weakest since the 1998/9 financial crisis.

There was also a notable shift in the opinions expressed by larger firms in the latest survey. “In the June 2014 survey, larger firms were unanimous in their views that the outlook for business conditions is satisfactory over the next 12 months, but this changed to just 22% of larger firms expressing a satisfactory outlook for the next 12 months. Larger firms expressed more depressed working conditions compared to medium- and smaller-sized firms.”

After reaching 82%, following the completion of the build-up to the 2010 Soccer World Cup, capacity use of technical staff improved to an average of 90%, since 2011, with no real change reported on a survey-to-survey basis.

Since 2009, the majority of respondents largely expected capacity use rates to remain unchanged and, although there was an increase in the number of firms that expected levels to improve between 2010 and 2011, this was reversed with only 21% expecting higher capacity use rates in the next six months.

Also speaking at the event, information management services provider Industry Insight CEO and economist Elsie Snyman noted that this downward trend was worrying. “Engineers have always been optimistic. . .if they are positive it means that there are [projects] coming, but with the negativity, [it portrays the] difficult position regarding capacity,” she said.

A total of 86 questionnaires were returned through an online and hard copy system, compared with 107 returns in the previous survey. The sample for the latest survey represented a fee income of R3-billion and 8 144 employees for the period from July to December 2014.

CHALLENGES
The lower satisfaction levels were spurred by a number of challenges, including unrealistic tendering fees remaining a concern for members, while the extended time it takes to finalise a proposal was affecting profitability in the industry.

Mayne added that many of the challenges were noted before the Department of Water and Sanitation recently announced the appointment of 34 Cuban engineers, which caused a stir among local engineering firms. “Skills are now being imported at a price that could have employed double the number of local and equally, if not better qualified, professionals.”

Of further concern is the fact that Cuban engineering skills are not recognised by the Engineering Council of South Africa (ECSA), because they are not part of the Washington Accord that governs international engineering qualifications. With significant spare capacity available locally, the use of imported skills had to be dealt with, said Cesa.

However, on the other hand, the quality of technical personnel was argued by some firms to have deteriorated, increasing risk in the built environment sector. The skills shortage was regarded as one the most significant institutional challenges faced by the private and public sectors.

Further, outstanding payments also posed challenges to industry.
Mayne stated that the overall value of outstanding payments, not yet invoiced, for confirmed appointments in firms’ order books increased by 2% in the last six months of 2014, compared with the first six months, following a reported increase of 7% in the previous survey.

“The ratio between prevailing order books and current earnings stabilised at 1:6 in the last two surveys, from 1:3 in the December 2013 survey. The outlook for medium-sized firms based on their order book values has improved since the last survey. The order book to income ratio improved from 1:3 in the June 2014 survey to 2:3 [by December]. This means the value of outstanding income for confirmed appointments are more than double their current income.”

For larger firms, the ratio moderated slightly to 1:5 in the current survey from 1:7 in the June 2014 survey. Larger firms expected only a marginal increase of 3% in earnings during the first six months of this year, compared with an expected 27% increase in earnings by medium-sized firms. Smaller and microenterprises expected much weaker conditions in the first half of this year, with earnings expected to contract by an average of 18%.

Snyman noted that nonpayment had become an issue across the board. “It is becoming a major issue. About 24% of earnings are outstanding for more than 90 days, compared to 15% in previous years. This is one of the highest that has been experienced in industry.”

She estimated that this was between R5-billion and R6-billion in outstanding fees and added that most of the nonpayment was coming from foreign clients, equating to about 60%. “This also indicates that firms are seeing an increase in earnings outside of South Africa,” Snyman said.

Further, she pointed out that 16% was outstanding from government, which she added was “quite high”, while local municipalities owed about 8%. “I am quite surprised by this low figure,” she said.

Profitability moderated to 12.2%, in the current survey, from a revised 13.7% in the previous survey. The average profit margin for firms employing more than 100 people fell from 11% in the first six months to just 4.3% in the current survey.

Medium-sized firms managed to maintain profit margins at around 14%, while smaller firms increased margins from 11% in the previous survey to 18%.

Contrary to previous surveys, the majority of larger firms (60%) now expected margins to recede in coming months, while about 25% of medium-sized firms expected margins to improve. The majority of medium-sized firms expected margins to remain static.

Not surprising, 60% of larger firms were dissatisfied with prevailing margins, compared with only 25% of medium-sized firms reporting unsatisfactory levels.

EMPLOYMENT EQUITY
The survey found that the appointment of black executive staff, measured by the contribution of black executive directors, nonexecutive directors, members and partners as a percentage of total executive staff, increased to 38.4% from 36% percent and 35.8% in the previous two surveys.

Women appointed at an executive level represented 10.1% of total executives, from 8.8% and 7.5% in the two previous surveys. Of the total women employed in the consulting engineering industry, 1.2% were appointed at an executive level (on par with the previous survey), compared with between 5% and 8% among male employees.

“Historically, engineering has been a male environment because of the sites [engineers work at]. These days, there is no reason why women cannot qualify as engineers and be exposed to the full sphere of engineering.”

Regulation issues, including the procurement of consulting engineering services, remain one of the biggest challenges faced by the industry. Procurement was currently based on price and broad-based black economic empowerment (BBBEE) points, with functionality or quality having a minimum threshold, thus being largely price driven. This was affecting tender prices, as firms sometimes tendered below cost in view of the diminished availability of projects.

Asked whether BBBEE policies was tarnishing industry, Mayne said he considered it as a “very productive, constructive” catalyst for transformation and change in the country and that it was not a “big make or break in business.

“For us, as consulting engineers, the real sticking point is the lack of consideration of quality. Engineering design and planning is a professional service that cannot be left to the uninformed, the uneducated or the unqualified; it has to be carried out by professionals registered with ECSA.

“The current tendering system places very little importance on the depth of quality within a firm. It is left to a simple [minimum quality] threshold. We want the focus to be on the highest-quality firms so that we can have growth in [the country’s engineering sector],” he noted.

Employment numbers in the industry also dropped by 2% in the last six months, Snyman said, adding that conditions were not conducive to job creation at the moment. This contraction also followed the 1% and 3% contractions reported in the previous two surveys. Employment was estimated to have declined by 3% year-on-year.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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