The economic cycle of the construction sector has bottomed out, paving the way for a significant turnaround in an industry that could support South Africa’s much-needed infrastructure development, professional services firm PwC revealed on Tuesday.

PwC’s inaugural edition of its ‘South Africa Construction’ report indicated that, despite the financial decline over the past few years, hefty penalties owing to anticompetitive behaviour and challenges in the industry, there were signs of financial recovery on the horizon.

“… a number of encouraging signs [have emerged] from the financial performance of individual companies, order book growth and public infrastructure commitments.” PwC partner Andries Rossouw said.

Further, the government’s infrastructure development plan and the establishment of the Presidential Infrastructure Coordinating Commission were positive signs for future growth in the industry, despite government’s delay in rolling out its infrastructure programme, resulting in the award of tenders and available work being deferred.

He noted that the industry had been “severely punished” for its lacklustre financial performance in the downcycle and impaired public perception following the Competition Commission’s investigation and settlement regarding collusive practices in the industry this year had dented it.

But, after remaining fairly flat from 2009 to 2011, capital expenditure by public-sector institutions had since increased 11.7%, with total expenditure in 2012 reaching R202-billion.

“The scale of this increase may be misleading, as new construction work only increased by 3.5% to R137-billion, while plant, machinery and equipment purchased increased by 55% to R38-billion,” he added.

Actual construction expenditure in 2012 was R7.3-billion below the 2011 forecast.

Overall revenue increased 21% to R145.7-billion over the past year, while operating expenses, including the Competition Commission penalties, increased 19%.

Rossouw noted, however, that the growth in the order book during 2013 was a marginal 1%, as opposed to 16% for 2012.

“The secured order book now only covers 1.2 times of current-year revenue, compared with the 1.5 times [current-year revenue ] of the prior year.”

Meanwhile, there were still a number of risk factors that could affect the industry.

“The common key risks identified by construction companies include risks to transformation, health, safety and environmental sustainability, followed by growth and expansion, and compliance with laws and regulation,” he said.

The risk of reputational damage resulting from noncompliance relating to anticompetitive behaviour was highlighted during 2013, while the low profit margin environment had placed additional pressure on strategic decisions relating to capacity, tender activity and pricing.

“Construction companies need to focus more fully on integrating risk and performance management into their strategies. Executive management will have to steer their companies through the low margin challenges, while recognising the impact on all stakeholders involved,” he concluded.