State tender delays hurt construction
Recent results from South Africa's biggest construction firms have made it clear that delays in issuing large tenders are hurting the sector.
At the root of the problem, it seems, is a lack of project management and engineering skills in government.
Aveng Group chairperson Angus Band told shareholders at a meeting earlier this month that adverse market conditions were continuing, most notably in the construction and steel sectors. He said that South Africa's R844-billion public sector infrastructure spend had not "translated into increased tender activity in the local market".
The company's orders had fallen by 9% since the end of June, which, Band said, reflected the building slump that was affecting the sector. Only 3.6% of its total order book was now coming from South Africa, down from 10.5% in 2010.
Murray & Roberts said at its annual general meeting in August that no tender documents for major infrastructure projects had been issued by the government, despite announcements by the treasury of major state-driven infrastructure developments to encourage job creation and grow the economy.
Murray & Roberts saw a diluted headline loss per share of 246c to the end of June, although it was an improvement on the previous year of 454c. It said it was experiencing "difficult marketing conditions and pressure on margins".
As it is, it has been a tough environment for the construction sector generally, with Basil Reed and Group 5 seeing their results plunge 78% and 64% respectively.
Official data indicates that there has been a drop in public sector spending on infrastructure – the national planning commission data shows a 30% drop in public sector spending since 2008.
The government has admitted in Parliament and in discussions about infrastructure development that there are skills shortages, although Gauteng infrastructure development MEC Qedani Mahlangu in August announced plans to increase capacity and launch stalled projects.
"The [Gauteng] department of infrastructure development has in the past performed less than optimally. We have struggled with delivery of quality infrastructure on time and within budget," she said.
To address this, she said, she had commissioned an independent report on the department and it had started advertising for technical professionals after it was found that 80% of the department's staff was administrative and 20% technical.
The treasury has set aside about R850-billion for public sector infrastructure projects over the next three years and South Africa is expected to spend about R4-trillion on infrastructure in the next 15 years. So far, about 25% of these have been financed and implemented. This amounts to R250-billion a year, about R100-billion more than the average over the past five years.
Investec analyst Annabel Bishop is not convinced that the government has the capacity to spend this money. She said the government had battled to spend previous amounts earmarked for infrastructure and, with the exception of the 2009 recession, the private sector remained the largest contributor to overall growth in fixed investment.
She said that, if properly implemented, the infrastructure roll-out could achieve its aim of halving structural unemployment by 2025. "But, in order to initiate infrastructure spend, growth and employment creation, the government needs to award and scope tenders to the private construction sector."
A senior official of a construction company, who asked not to be named, said small and medium enterprises subcontracted by his company were most affected by the delay of these megaprojects. "They planned for these large projects and they never materialised," he said.
A lack of capacity at government level to oversee the projects was given as the reason why the projects had been mothballed. "We were told there was no one presently at government level to oversee a large infrastructure project that we had been working on for some time."
A report released by the municipal demarcation board in October on the 2010-2011 financial year raises doubts about the government's plans to increase its infrastructure development roll-out, particularly in rural areas. The board found that although "there was large infrastructure asset value present in municipalities, they do not have the engineering capacity to manage these assets".
There is also an uneven distribution of engineers and municipal planners, with 127 engineers on average in large metros against one engineer in the more rural municipalities.
Sandra Burmeister, chief executive officer of recruitment group Landelahni, said that based on a infrastructure sector survey it conducted, South Africa was not training enough engineers, artisans and technicians to deliver on its infrastructure programmes in the medium term. She said that the government needed a skills road map to accompany its infrastructure plan.
Philip Grobbler, project director of engineering firm GIBB, said he believed that the delays in issuing tenders were due to a combination of things, such as a lack of skills, capacity, and unnecessarily long-winded government procedures, that were slowing down the tender process. He said the situation was worse in rural or small district municipalities.
Expertise and capacity
"The government has the funds for the projects, but it lacks the skills and the capacity to implement them. A tender for a consultant takes nine months when it could be done in three months. And then, if there is an appeal, it could take 12 months," Grobbler said. "There are too many processes in place and too much red tape that delays decision-making."
He said the lack of skills and capacity was most evident when dealing with district municipalities. "Some of the bigger metros have the expertise and capacity, but the lack of staff at small metros is evident just from the quality of the tenders sent out, which tend to be vague and have gaps.
"We desperately need to find a way to attract experienced or skilled engineers to the government, both locally and nationally," he said.
In their annual reports, companies expressed frustration about abandoned projects or projects being placed on hold after they had spent tens of millions of rands on tender proposals. Among the projects that have been shelved are the R10-billion N1/N2 winelands toll road, a R5-billion Gauteng sanitation programme, the high-speed rail link between Durban and Johannesburg, plans to build prisons, and upgrades to Chris Hani Baragwanath Hospital.
But some in the sector are positive that there will be an increase in projects. Nedbank's biannual capital expenditure project listings show an increase in the number of projects. Sixty new projects were recorded in the first half of the year, against 36 in the same period for 2010.
Like Investec, Nedbank said the private sector remained the main driver of investment plans, although its contribution to both the total value and the number of projects had declined substantially, down to 57% of the projects for the first half of 2012 against 74% for 2011.