The South African civil construction industry experienced a “mixed bag” of business conditions in 2013, with industry turnover for the 12 months contracting by 5% to R38.9-billion, the South African Forum of Civil Engineering Contractors (Safcec) noted in a recent report.

The organisation revealed in its State of the South African Civil Industry Report that, although budgetary allocations towards public infrastructure for the next three years were not reduced in the 2014/15 Budget, projected expenditure would be “barely enough” to cater for higher construction costs over the period, it asserted.

Nominal growth in total public-sector infrastructure is expected to increase by 8.1% in 2014/15 and 5.4% in 2015/16 but fall by 0.3% in 2016/17, totalling R847-billion over the medium-term expenditure framework.

“Thus in real terms, total infrastructure expenditure is likely to contract over the next three years. The contribution of infrastructure spending by State-owned enterprises (SOEs) as a percentage of total public infrastructure expenditure will soften in the next three years to 43%, mainly owing to a slowdown in energy infrastructure expenditure,” the report stated.

Meanwhile, the industry continued to grapple with “familiar” issues, such as a lack of skills affecting project planning and implementation, nonexpenditure of budgets, “unfair” tender procurement and the slow awarding of contracts, remain “sensitive” to the impact on tenders in the post-election period.

Tender activity generally increased in the run-up to an election for “various reasons”, but this momentum was quickly reversed after the election, as tender activity generally slowed by between 10% and 15%, resulting in tendered projects not reaching awarded stage.

“This could be the result of a political agenda, where projects are put out to tender to encourage voters in a particular area, after which projects may be postponed, owing to a lack of available funds, or a change of staff members in a specific department. For whatever reason, the industry generally does not walk away unscathed during election periods,” it stated.

Meanwhile, as part of government’s focus on skills development and job creation, through programmes such as the Expanded Public Works Programme and other initiatives to encourage spatial transformation, contracts were generally divided into smaller more manageable contracts, which Safcec believed had created increased opportunities for the medium-sized and small contractors.

“We have seen a gradual shift in favour of medium-sized and small contractors, while the contribution of larger firms, according to recent data released by Statistics South Africa, has moderated from 61.8% in the second quarter of 2012 to 55.3% in the third quarter of 2013,” it said.

Pessimism about the awarding of tenders continued in the fourth quarter of 2013, with firms reporting that they were less optimistic about the value of contracts awarded during the current survey.

According to an independent project database of construction activity, the number of civil contracts awarded fell by 9.8% in the fourth quarter of 2013 – the third consecutive quarter of negative year-on-year growth.

Overall, there were 5% fewer civil contracts awarded in 2013, compared with 2012, in contrast to a 7% increase in the number of published tenders.

“Comparing the publication of tenders and the awarding of contracts over the last few years, it is clear that, as from 2008, the awarding of civil contracts has been lagging,” the report noted.

Meanwhile, although firms had “not been too negative” regarding the state of their order books, they acknowledged becoming increasingly affected by policy uncertainties and labour disruptions in the mining sector, the slowdown in infrastructure spending by SOEs and the proliferation of contracts into smaller manageable contracts.

In addition, profitability and prices remained under pressure.

“It can be expected that profit margins will be negatively affected as competition in tendering increases because contractors need to be more competitive in their tender prices. Reduced tender prices, alongside an increase in input costs, may pose a challenge for medium-sized contractors if not carefully managed,” said Safcec.

Price pressures are expected to accelerate in 2014 as currency volatility is expected to impact on the cost of plant equipment and fuel, while consumer inflation is also expected to increase at a faster pace, averaging 6.2% in 2014.

Including the four main drivers of construction input cost inflation – plant, fuel, materials and labour – input costs are expected to accelerate from an average increase of 5.7% in 2013 to 8.1% in 2014.

Meanwhile, the quarter-to-quarter move-ment in the civil industry’s confidence index remained volatile, with more firms concerned about the outlook for the industry than those that were expecting improved conditions.

The underlying trend has, however, started to show some improvement, suggesting that conditions are not deteriorating any further.

“Considering all the above, we expect the industry to show a marginal recovery in 2014, increasing by between 3% and 5% in real terms, supported by higher real growth in infrastructure expenditure by government and a marginal increase in expenditure by SOEs,” noted the report.