Construction sector liquidations up 32% in 2022

With Statistics SA figures showing that construction sector liquidations increased by 32% in 2022, compared to an overall decrease of 1% across all sectors of the economy, construction market intelligence firm Industry Insight says this clearly highlights the difficult position experienced by the local construction industry.

According to Stats SA, 94 construction sector companies closed their doors in 2022, with compulsory liquidations increasing year on year by 56% and voluntary liquidations by 29%.

In light of this, Master Builders South Africa (MBSA) executive director Roy Mnisi believes the struggling construction industry is at best likely to only experience a slight improvement in 2023, while still facing major challenges – including a lack of major contracts and disruption of work sites by business forums and the so-called construction mafia.

“It does not look like activity levels in [the] sector will be any different in 2023 … ” he told Moneyweb.

“More so because of the issues around economic growth. Our economic growth projections are still very low and if you look at infrastructure development as well, the plans remain the same,” added Mnisi.

This is a reference to South African Reserve Bank (Sarb) Governor Lesetja Kganyago’s admission late last month that GDP growth for the whole of the 2022 is expected to come in at 2.5%, compared to 1.8% in 2021 – with the Sarb now forecasting GDP growth of only 0.3% for 2023 because of extensive load shedding and other logistical constraints.

Read: Power crisis: Sarb slashes GDP forecast in half for next two years

Industry Insight said the real story from the Sarb’s monetary policy committee meeting was the sharp downward revision in the GDP growth expectation from an initial estimate of 1.1% to 0.3% in 2023 – “dangerously close to an economic recession”.

The Sarb has also slashed its SA GDP growth forecast from 1.4% to 0.7% in 2024, and from 1.5% to 1% for 2025.

Another challenging year

Mnisi said the construction industry is looking at phase two of the government’s infrastructure development plan “but we are not confident it will make any difference at all and that our members should brace themselves for another challenging year”.

He said construction firms will once again face the threat of closure because of financial challenges caused by insufficient work.

“The challenge is that the economy bedevils the sector because of issues such as the lack of sufficient work to keep many companies afloat, the construction mafia, Eskom [load shedding], non-payment and so forth,” added Mnisi.

“It’s challenging and we see some companies closing shop. We see some smaller ones coming up as well but that doesn’t necessarily close the [capacity] gap that is getting created year on year.”

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However, Mnisi said there are potential opportunities, particularly if the government declares the Eskom situation a state of disaster.

“That can release some economic opportunities that will assist in terms of boosting and bolstering the construction industry and enabling the economy to deal with the damage created by load shedding,” he said.

Construction mafia 

Speaking about the construction mafia, Consulting Engineers South Africa (Cesa) CEO Chris Campbell said such mafias remain a threat to the sector and will certainly hamper the industry in 2023.

He said there also need to be more serious consequences for those who have been found wanting in terms of corruption in the industry so that more people start reconsidering their behaviour.

Read:
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Campbell believes the sector will have to brace itself for a further challenging 12 to 18 months – and beyond the 2024 general election – because good people in the public sector who want to get things done will find themselves absorbed and their time taken up by competing priorities in the build-up to an election year.

He said it is unlikely there will be a change to the construction industry environment in 2023 despite the abundant opportunities for the industry in South Africa.

“We could make Dubai look like nothing if we got all our ducks in a row and turned the country into a construction site with tower cranes here, there and everywhere,” added Campbell.

He said South Africa’s immediate problem is the unreliability and lack of power, but the way out of this problem is through a partnership with the private sector.

Transmission opportunity

Campbell stressed that the private sector has embedded generation but cannot feed this energy into the system because of a lack of transmission capacity, which is an opportunity that needs to be leveraged.

“The custodians of the transmission company will not have the funds, which is an investment opportunity and an opportunity for the construction sector.

“Over 8 500km of transmission lines need to be developed. The knock-on effect that could have through the value chain and creating jobs down in the manufacturing sector for cement and steel are huge,” said Campbell.

“That is not going to happen instantaneously, but it will grow incrementally. We have got to start now,” he said.

Read: SA transmission firm seen hobbled by Eskom millstone

SA Forum of Civil Engineering Contractors (Safcec) CEO Webster Mfebe believes the outlook for the consulting engineering industry in 2023 is brighter than in past years because planned projects should now be reaching implementation stage.

“We hope that the president cracks the whip and makes sure his statements that infrastructure provision will lead the economic recovery of the country [comes to fruition],” he said.

He added that the major threats to the industry in 2023 include whether there is sufficient ability and capacity in government to oversee the planned huge infrastructure expenditure to ensure it is rolled out without any glitches, the inadequate and unreliable supply of electricity, and political stability.

Mfebe said load shedding creates problems for all sectors of the economy and increases the input costs for the construction industry and the affordability of infrastructure to government.

He said poverty and lack of employment, particularly among the youth, remains a major threat to the industry because it is “weaponised” together with the lack of basic services “by chance takers to use construction sites to cause instability when construction of infrastructure is supposed to lead the economic recovery”.

Industry Insight said there is “a high probability” of an increase in infrastructure allocations by government because Finance Minister Enoch Godongwana announced in the Medium-Term Budget Policy Statement in October 2022 that investment in buildings and other fixed assets is projected to increase by an average of 17% (nominal) over the 2023 Medium Term Expenditure Framework period from 2023/24 to 2025/26.