Tax evasion has been highlighted as a deeply rooted issue in the construction industry – one of the most competitive industries in the South African economy – states credit solutions provider Coface South Africa lead analyst Saijil Singh.

The South African Revenue Service (Sars) announced in May 2012 that it aimed to tackle rampant tax fraud in the construction sector, noting that, as this sector received a significant amount of public infrastructure spending from the fiscus, compliance was critical.

“We intend to ensure that those companies benefiting from public-sector tenders maintain their compliance for the duration of the contract and don’t merely provide a tax clearance certificate at the beginning of the process,” Sars commissioner George Magashula told Parliament’s Standing Committee on Finance last year.

The number of value-added-tax registered entities in the construction industry is disproportionate to the number of operating entities, states Singh. While strategies are being implemented to combat this, the effect is expected to be minimal, owing to the shortage of resources to police non-adherence.

The cost of having tax administrators undertake formal investigations to determine the volume of small-scale contractors’ nonadherence also far outweighs penalty benefits.

Singh explains that small contractors have traditionally used price competitiveness to maintain client bases, as brand awareness is nonexistent in the construction industry’s supply-phase stream. Therefore, small contractors have historically worked on small margins to remain in business.

Secondary to this is the general lack of formalised business acumen, which leads to the inaccurate pricing of products.

“A shrinking demand and oversupply of labour are also evident in the industry; therefore, in some cases, small to medium-sized enterprises cannot afford to pay taxes,” says Singh.

He notes that the basis for fraud is also to be found in the moral fibre of South Africa’s society and the construction sector is not immune to this. “It’s just more prominent in this sector, owing to the scale of small enterprises operating with minimal prescribed governance.”

The Department of Public Works (DPW) has urged the construction industry to deal with fraud and corruption. The announcement was made following the launch of the National Contractor Development Pro- gramme (NCDP) in December.

The NCDP is a partnership between the Construction Industry Development Board (CIDB) and the national and provincial departments of Public Works.
The DPW has committed to assist in the development of previously disadvantaged contractors and to helping align individual contractor development programmes or initiatives with the principles set out in the NCDP framework, explains Singh.

Labour

Coface expects labour costs to continue increasing at an average rate of 7% in 2013. With an estimated final growth rate of 1.7% in 2012 and a projected industry growth rate of 3% in 2013, market conditions will continue to remain challenging, despite the increased demand owing to the proposed government spend on the roll-out of planned infrastructure projects.

As a result, the sale of building materials has decreased by 10% year-on-year in 2011 to 16% year-on-year in 2012 – its biggest drop since 2004.

According to the ‘Statistics South Africa, The Construction Industry 2011’ report, employment in the industry decreased by 2.9% a year, compared with the number of employees reported in the 2007 survey. At the end of 2011, the construction industry employed about 540 581 workers.

Of that total, 154 018 workers are employed in the construction of civil engineering structures, 117 495 in the construction of buildings, 39 305 as electrical contractors and 34 487 in other construction activities involving the completion of buildings.

“A possible cushion to the oversupply of labour and a possible mechanism to create opportunities could be for government to revise the method of allocating budgets for municipal functions,” says Singh. Figures indicate that only 72.5% of the total capital budget provided for municipalities was spent in 2012, resulting in underspending of R12.8-billion, he concludes.