Project economy disconnect

Although one-sided and therefore distorted, the most recent outlook statements from South Africa’s leading construction companies still provide some valuable insight into the state of this country’s project economy. Sadly, the news is not all that encouraging, even though most firms are reflecting that the worst is probably over.

Murray & Roberts, for instance, indicates that its international operations are likely to drive its earnings over the medium to long term. Aveng’s immediate prospects are being weighed down by its South African operations, while the group’s Australasian and Pacific businesses remain strong. Group Five says the markets in which it currently trades still remain comparatively weak.

Although WBHO expresses a preference for working in South Africa, it is increasing its African footprint to secure new markets and higher margins. Similarly, Basil Read is actively pursuing opportunities across the rest of the continent to mitigate the risks associated with South Africa, while Steffanuti Stocks expects the markets to remain challenging for some time.

Add to that mix the slower-than-expected public infrastructure spending, an extremely cautious private sector and what is euphemistically referred to as a volatile industrial relations setting and it makes for a truly unhappy environment – one made even worse by revelations that construction companies have been less than honest in their dealings over the past decade.

Somewhat maddeningly, this is all occurring at a time of supposed unwavering support for a large-scale infrastructure push to deal with South Africa’s still material social and economic infrastructure backlogs. It could, thus, be argued that there is currenlty a deep disconnect between the South African government’s rhetoric on infrastructure and the actual project-economy reality.

There are pockets of resilience, though. The Renewable Energy Independent Power Producer Procurement Programme is a case in point, with 47 projects currently under development and a third bidding round under way.

There are also reports of relatively vibrant tender activity, particularly among State-owned companies such as Eskom and Transnet and some other public-sector clients. Many are, however, lamenting the lack of vibrancy with regards to actual contract awards.

This publication attempts to step back and take a look at some of the major developments under way, including the high-profile energy and transport projects, as well as the some of the lower-profile public and private developments.

What remains apparent is that private–sector pipeline remains especially weak, owing to poor levels of investor confidence. Nevertheless, project activity is continuing across most of the mining subsectors and in some pockets of industry.

Finance Minister Pravin Gordhan hit the nail on the head recently when he stressed the need for higher levels of investment into export-oriented projects.

Indeed, the expenditure being made to expand South Africa’s economic infrastructure will not yield the growth and development returns anticipated unless it serves to crowd in the productive investments required to make those new assets sweat. It is a disconnect that has to be addressed and addressed with some urgency.

This report draws from material published over the past 12 months and is a summary of other sources of information published in Engineering News and Mining Weekly, as well as information available in the public domain. This report does not purport to provide an analysis of market trends.

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Published on: 30 September 2013.