Good news and bad news for SA construction industry

There is good and bad news for South Africa’s beleaguered construction industry in the current data about civil contract awards and the value and number of projects out for tender.

A report by construction market intelligence firm Industry Insight says the nominal value of civil contracts awarded improved by 36% in June following an equally strong increase in May, and was 25% higher in the first half of 2022.

The firm said this follows improved tender activity during most of 2021 but highlighted that the industry is picking up from a very low base.

“Taking into consideration the fast acceleration in [prices of] construction materials this year, the real value of civil contracts awarded increased by 12% in the first six months,” it said.

Industry Insight also reported that the total estimated rand value of tenders released in June 2022 decreased by 11% compared to June 2021, and followed the more than 30% contraction reported in May 2022.

“Overall tender values are down by between 25% and 30% in the first six months of 2022 while the number of civil projects out to tender also slumped by 40%,” it said.

“This puts greater pressure on competition in tendering prices and profitability as work opportunities are on the decline in the sector.”

This is also negative for the future prospects of the construction industry.

Activity yet uncertainty

Consulting Engineers South Africa (Cesa) CEO Chris Campbell said on Monday that many construction companies, particularly the larger firms, are reasonably busy.

But he said the prospects for work in the short term are uncertain, particularly as this is dependent on funds being available for projects.

Campbell said there is also a need to be aware that a consultant’s work is at the design level stage and it sometimes takes several years before those projects move into the construction phase.

Dr Hurbert Joynt, programme manager for Infrastructure South Africa’s Centre for Excellence, told a National Council of Provinces select committee last week that it is clear from the GDP data for the first quarter of 2022 that the construction industry is not performing well.

Joynt said this is as a result of the economy experiencing negative growth and underwhelming residential building and construction work.

Read: SA faces R4.8trn infrastructure investment gap by 2030

Fewer postponements

Industry Insight reported an improvement in the postponement rate of projects in the civil industry in relation to the number of tenders issued.

It said the number of projects postponed improved to below 6% by mid-2021 from more than 16% in 2009/2010.

However, the postponement rate has gradually increased to over 8% in the last three months “as poor economic growth inhibits the government’s infrastructure programme”.

“Projects are placed on hold for various reasons but often financial constraints are to blame.

“Community interference is another key factor delaying projects,” it said.

Encouraging signs

Industry Insight highlighted some interesting developments in July.

These include:

• The announcement by Minister of Home Affairs Aaron Motsoaledi of a R6 billion plan to overhaul six of South Africa’s border posts.

• The establishment of a new National Water Resource Infrastructure Agency to plan and implement a range of major projects to augment national bulk water resource infrastructure.

• Transnet’s announcement that it will be investing R44 billion into ports over the next five years, including a major upgrade to the Durban port to more than triple its container capacity.

• Treasury’s announcements that pension funds will from 2023 be permitted to invest 45% of their capital in infrastructure projects after the final amendments to Regulation 28 of the Pension Funds Act was published.

• President Cyril Ramaphosa’s Renewable Energy plan, which includes major new groundbreaking initiatives.

In regard to the establishment of a National Water Resource Infrastructure Agency, it said ageing infrastructure is starting to cripple areas as the effects of a lack of maintenance is felt, mentioning an area in Sandton where residents recorded more than 20 major pipe bursts since October 2021.

Industry Insight said the amendments to the Pension Funds Act “will be an interesting development going forward” but warned that pension fund administrators may not be fully skilled to deal with infrastructure projects.

Commenting on Ramaphosa’s Renewable Energy Plan, it described the inclusion of the private sector to restore some sort of balance in the current energy supply chain as “a major milestone”.

However, it warned that many projects in Bid Window 5 of the Renewable Energy Independent. Power Producer Procurement Programmemay have to be reevaluated based on available grid capacity.

Industry Insight said the Northern Cape has proven to be a popular are as it has the highest solar radiation levels in the country, but warned that the province currently has zero grid capacity available, rendering any new project installed somewhat impractical.

Campbell said the backlog of infrastructure projects “is like a tsunami” and is potential work.

He said many state-owned entities are now looking at how they are going to catch up and reduce the backlog.

Campbell said Rand Water, for example, has a multiplicity of projects and in excess of five years of backlog while the same can be said of Eskom, which along with the need to start bringing private sector producers on stream, must simultaneously address the transmission capacity bottleneck.

He said Sanral (South African National Roads Agency) also has a massive backlog and challenges, and is now also inheriting all of the North West province’s provincial roads.

“Transnet Rail has been a few years behind and we have missed yet another commodity boom. Prasa [Passenger Rail Agency of South Africa] is now in such a state that to rehabilitate it is not going to happen overnight.

“There is so much to be done. If we can get our act together and get all of these things going, it will be a step-change for our economic growth,” he said.

Campbell believes that with so much work that needs to be done, a rethink is required on the open tender process.