Corporate action positioning South Africa as a consulting engineering gateway to Africa

15th February 2013

By: Schalk Burger

Creamer Media Senior Deputy Editor

  

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There has been a strong increase in corporate activity in South African consulting engineering over the last few months, with international groups teaming up with well-established domestic entities to create new Africa-focused organisational platforms.

A common feature of most, if not all, of these transactions is a desire to use South Africa as a gateway for accelerated and expanded activity into the rest of Africa, which is increasingly regarded as an important new engineering and infrastructure frontier.

The Africa Infrastructure Country Diagnostic estimates that investments of $93-billion a year from 2010 to 2020 would be needed to close the infrastructure gap with other developing regions. About two-thirds of this sum would be for construction and rehabilitation and one-third for maintenance.

This number represents just under 15% of the region’s gross domestic product, while the global average yearly invest- ment in infrastructure is around 9% of countries’ gross national product, reports market research company Ernst & Young in its ‘Africa Attractiveness Survey 2012’.

About $90-billion a year from domestic sources, develop- ment institutions and private- sector investors was invested in 2010 and 2011, the company reports.

There has been an acceler- ation of mergers and acquisi- tions involving local and inter- national firms, Consulting Engineers South Africa (Cesa) CEO Graham Pirie confirms.

He says the consolidation is taking place against the backdrop of a significant rise in the number of projects on the African continent, which also offer opportunities to deliver matched commercial infrastructure projects along development corridors and at commercial nodes.

“Importantly, many projects in Africa are cross-border, which offer opportunities of good returns, but have higher asso- ciated risks,” notes Pirie.

Through consolidation, companies are able to diversify their disciplines and geographic footprints and are, therefore, better able to handle the vagaries of the industry, which is cyclical by nature, he adds.

For example, local consulting engineering firm BKS recently merged with US professional technical and management support services company Aecom Technology Corporation.

The decision to merge was based on a desire to position the company for growth beyond the borders of South Africa, particularly in the rest of Africa, says Aecom South Africa MD Danai Magugumela.

“This forms part of BKS’s strategy to become more global-ised in its consulting engineering services in the areas of buildings, stadiums and transportation, as well as water and sanitation for public- and private-sector clients.”

The combined efforts would position both companies to offer a more comprehensive solution in key growth regions, says Aecom CEO and chairperson John Dionisio.

“BKS’s experience in providing services in the transportation, water, environment, energy, building engineering, project management and mining markets will bolster Aecom’s ability to meet clients’ needs throughout Africa,” he added.

“Access to Aecom expertise in terms of best practices in a number of sectors and geo- graphies promises to bring augmented value to our existing clientele. Simultaneously, this merger will expand career development opportunities for our employees,” says Magu-gumela.

There have also been a range of similar examples in recent years, with the emergence of engineering, management and specialist technical services group Aurecon – formed through the 2009 merger of Africon, Connell Wagner and Ninham Shand – an early example.

Aurecon COO Dr Gustav Rohde says consolidation of the industry presents enhanced opportunities for local professionals to work on large, complex projects.

“The creation of Aurecon saw our local staff maintaining their ownership and a significant role in the company’s global board and leadership. We retain a stake in our collective future. This is a vital part of ensuring that local staff, and their communities, benefit economically from the success that this kind of consolidation implies.”

There is, however, a realisation that these larger opportunities present complex challenges, which are too big for smaller, local companies to tackle in isolation, he outlines.

Local companies have critical knowledge of local conditions, but complementary skills are critical for the successful delivery of these projects. As a result, another key benefit of this process is that of knowledge transfer.

In a knowledge economy, Rohde adds, bigger organisations can more effectively share knowledge, owing partly to new information technology systems linking their global offices. When local companies collaborate with international experts, each shares its knowledge through global corporate networks to arrive at best-of-breed solutions for project challenges.

“This process enables large, global organisations to attract South African professionals to be a part of a global firm, without a loss of skills on the con- tinent,” he says.

“We are part of the global village and the global competition for skills. If we had not positioned ourselves to compete for these skills, we would have isolated ourselves and lost out,” says Rohde.

Tracking Growth

Engineering companies are increasingly focusing on new areas of growth, including Africa.

“Many large companies are considering, firstly, the Far East for growth opportunities and, secondly, Africa,” says Dr Thomas Marshall, Africa division COO of engineering consulting firm SMEC South Africa, which was formed last year when South African firm Vela VKE merged with Australia’s SMEC. “However, global companies have long-term views and want to ensure that they are present in Africa now to capture growth in the future.”

Global companies search for technical resources to expand their resource base without multiple transactions, which means that larger companies are most sought after, he avers.

“In general, it is about getting resources. Localisation is also an important part of global firms’ strategies because this means getting local resources close to where they are needed, with the benefits of local costs, local skills and local knowledge,” notes Marshall.

There are significant oppor- tunities for growth in Africa because the continent is significantly underdeveloped. This underdevelopment makes project execution difficult, but it does create opportunities for companies, however, as the infrastructure needed for resource exploitation must be developed, he explains.

“This means that there are opportunities in Africa, but companies will require big balance sheets and real clout to successfully provide services and support projects under development,” notes Marshall.

Good economic fundamentals in Africa, specifically the increasing population, the continent’s mineral resources, as well as new market opportunities for inter- national companies, make it an attractive destination for expansion, if approached correctly.

Royal HaskoningDHV South Africa COO Francis Gibbons says barriers to entry to new geo- graphic markets and market sectors are high. It is often easier to gain access to a market sector or geography through an acqui- sition than through organic growth.

Royal HaskoningDHV South Africa itself was formed in 2012 following the completion of a merger between Royal Haskoning and DHV Group, of which well-known South African consul- tancy SSI was part.

“Accessing new markets fuels the trend of consolidation, as companies aiming to enter a market sector would rather buy a company with the appropriate track record and expertise to fast-track their entry into that market,” he says.

The demands put on com- panies by their clients and by tender requirements for projects are such that a company cannot merely enter a specific market sector, but must have in-house expertise and present a record in that market sector, highlights Gibbons.

Large companies that are fully diversified in their geographic and market sector have an advantage with regard to risk management, as they are able to weather market sector downturns better. They also tend to spend more on research and development, have access to more and better tech- nologies and processes than smaller companies and are at the forefront of international best practice, he says.

The complexity of projects has increased and South African firms are able to remain globally competitive through their association with international companies and the application of international best practice. There will always be opportunities for small firms with local or specialist expertise, but consolidation among middle and large companies will con-tinue, says Gibbons.

Good for Africa, Good for Us

Alive to the opportunities arising in the rest of Africa, Cesa, in a joint venture with several built-environment professional groupings, and in partnership with the Department of Trade and Industry, founded the nonprofit Built Environment Professions Export Council (Bepec) to support firms in exporting their services internationally.

Pirie cites the lack of infrastructure that hampers access to resources and reduces the opportunities for local beneficiation of resources in Africa as an example. Developing infrastructure to connect regions on the continent is also a significant opportunity for consulting firms to enter the African market.

“What is good for Africa is good for us and we must assist in developing the continent, which, in turn, will help us to build local capacity and relations with the rest of the continent,” he explains.

Despite the obstacles of politi- cal risk, policy incoherence, corruption and risks to private equity, the private sector is emerging on the African continent, partly owing to the cooperation between State organisations and private companies.

“Cesa is a member of the International Federation of Consulting Engineers and of its regional counterpart, the Group of African Member Associations. This provides an opportunity to identify trustworthy partners for potential cooperation in project delivery.”

These industry bodies help to build local capacity and assist their members in building relationships with private companies and public-sector client organisations. Further, the lack of client capacity to manage the technical details of projects is a significant problem and industry bodies are supporting clients in increasing their capacity to manage projects, Pirie explains.

“Countries should have national integrated development plans that transcend boundaries and a vision for infrastructure development that fits into these plans. This means recognising the wider needs of the region,” he highlights.

Business Warning

However, there are a significant number of challenges that global companies must overcome to operate effectively in Africa, warns consulting engineering firm Knight Piésold MD Leon Furstenburg.

“Africa is difficult to work in. Most South African companies that ventured into the continent did so out of necessity. Some were not paid, others have had difficulties in moving money or struggled with long delays of deliveries and payments; there are also significant challenges with corruption.”

Further, Furstenburg believes that the quickened investment sentiment will fade if Eastern European or Asian countries present better investment opportunities.

“This will then lead to disinvestment, which can result in the consulting industry losing significant skills and companies and countries losing indigenous capacity.

“South African companies entered Africa owing to local work opportunities drying up, which is the same reason that international firms are entering the African markets. International firms will experience a number of harsh lessons about Africa, similar to those learned by South African firms,” he concludes.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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