Construction suffers while state dithers

The government has an R808-billion arsenal which it plans to use on maintaining and improving the country’s infrastructure over the next three years. This is equal to the government’s annual revenue and is a serious cash injection into the economy at a time when growth is weak and unemployment is above 25%.

Spending on infrastructure is a constructive way to stimulate growth and employment. Unlike consumption spending on wages and social grants, infrastructure has a multiplier effect and boosts long-term economic growth.

But, according to figures in the latest Reserve Bank Bulletin, growth in government consumption expenditure has been increasing while fixed capital spending continues to decline.

The latest results from construction companies suggest that, despite many previous announcements on infrastructure spending, it has not materialised. During the past month, South Africa’s major construction firms—Murray & Roberts (M&R), Group Five, Aveng and WBHO—have all announced a significant fall in earnings, of between 20% and 50%. The JSE’s construction sector index has fallen nearly 30% this year.

While a fall in spending by the private sector was largely expected, with companies sitting on cash during difficult times, this is when the government would usually step in to boost economic growth as part of its counter-cyclical fiscal strategy.

Construction firms complain that under-spending by the public sector has created very tight trading conditions. Currently public spending makes up about 20% of Aveng’s order book compared to other years when it has been between 40% to 50%.

M&R spokesperson Ed Jardim said that, although the company expected conditions in the local construction market to improve only from June 2013, the government had a key role to play in this market.

“We believe that the government’s role is a catalyst for an improvement in the market and there is a need for the government to deliver fully on its commitment to spend R810-billion on infrastructure projects.”

Greater profit contributions
Commenting on Aveng’s results last week, chief executive Roger Jardine said that, given the weakness in infrastructure spend in South Africa and the growth outside the country, the company was looking at greater profit contributions from regions such as Australia and East Asia.

WHBO chief executive Louwtjie Nel said that 50% of the company’s business was now outside South Africa, where margins were better. Strong growth was expected from WHBO’s Australian operations. Although this would benefit shareholders, it would not create jobs locally.

Grant Cloete, Investec Asset Management construction analyst, said there had been a significant fall in the number of projects announced by the government. The latest Nedbank capital expenditure project listing report showed that, in 2008, the government announced R42-billion worth of projects, R19-billion was announced in 2009 and, in 2010, only R4.2-billion was announced, representing only 10% of the value of projects in 2008. This was putting construction companies in a difficult position. In the expectation of large projects, they had scaled up their operations and hired and trained workers.

Cloete said WBHO was aiming for about R13-billion of its R23-billion building projects pipeline to come from government projects, specifically in education, hospitals and public/private partnerships.

M&R has set its sights on public sector projects worth about R10-billion. “We believe that even if government put projects out to tender now construction would not start this year and the benefit of these contracts would only be seen in the group’s 2013/2014 financial year,” Jardim said.

Construction companies have spent significant amounts on tenders for major projects that have been lying dormant for more than a year and they are reluctant to cut their work force while there is a hope that the infrastructure deals will materialise. But this overcapacity is eating into their margins and, if the government cannot speed up the projects, specifically those involving public/private partnerships, there could be massive retrenchments in the industry.

Last year the government spent R183-billion on infrastructure, but much of that was on maintenance projects and Eskom, with a significant portion of M&R’s order book coming from Eskom alone.

The South African National Roads Agency Limited’s infrastructure projects, such as the Gauteng Freeway project, also account for much of the spend. The winning consortium for the N1-N2 Winelands project is expected to be announced shortly. But it is social infrastructure, such as housing, hospitals, schools and prisons, that is lagging behind because of a lack of planning capacity, especially at local and provincial government level.

President Jacob Zuma recently announced a presidential infrastructure co-ordinating commission to tackle this, but the industry is not holding its breath. “In a few months’ time they will announce another commission to review this commission,” an industry commentator said.

Overregulation and red tape seem to be major obstacles for many projects. In the Western Cape, the low-cost housing project Pelican Park has been delayed by years by regulations governing the acquisition of land and taking the project through all the bureaucratic processes at local and provincial level. In July last year, Western Cape premier Helen Zille provided Zuma with 70 pages of recommendations for amendments to what she described as the “brick wall of bureaucracy, law and regulation” that obstructs service delivery.

There are also concerns about tender processes and fraud, which bloat the costs of construction, and Cloete raised another important issue - the current investigation by the Competition Commission into alleged collusion in the construction industry. He said that both the government and the private sector might be hesitant to commit to projects while the outcome was awaited.

“If a company that has been awarded a big contract now has to pay a fine it will affect the cash flow, which could result in the project being abandoned,” Cloete said.

The commission’s finding were expected only next year and, until then, many potential construction projects could to be in limbo. He said fast-tracking the inquiry, or at least providing some certainty about the penalties, was necessary to allow some projects to start.

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