Government unable to lift construction sector ‘out of the ashes’ on its own

Government alone cannot lift the construction industry out of the ashes despite the R340 billion pipeline announced in various infrastructure sectors, according to construction market intelligence firm Industry Insight.

The firm said it is becoming more and more apparent that the private sector does not buy into all the promises that President Cyril Ramaphosa has made over the last two to three years because the country is still yet to see any meaningful economic reform and progress on reforming Eskom, corruption and so on.

“Very, very little has actually been done, with many of the president’s promises broken. Thus, breaking it down to a realistic annual investment, it will not be the miracle cure for the current dismal position faced by the local construction sector unless confidence levels are restored in the private sector,” it said in response to Ramaphosa’s comments in his State of the Nation Address (Sona) about the government’s infrastructure expenditure plan as part of the post Covid-19 economic recovery plan.

Paralysis persists

Industry Insight said Sona includes bold infrastructure promises to deliver on the “massive” infrastructure rollout but implementation paralysis persists within broader reforms.

The firm added that while the infrastructure rollout relies heavily on private sector participation, contributions from the fiscus will certainly determine success or failure.

It said Ramaphosa announced several large mega projects in the pipeline – funded in part by the private sector, the fiscus, and contributions by the R100 billion Infrastructure Fund – adding that the economic impact of infrastructure expenditure on the economy is immense because it leads to job creation and supports more sustainable economic growth.

It therefore should remain a pillar for economic prosperity, Industry Insight said.

The firm added that South Africa is a country faced with significant infrastructure backlogs and an almost insoluble unemployment rate, highlighting that the private sector is a major contributor to investment, contributing over 50% to total investment in construction.

Confidence levels

However, Industry Insight said confidence levels have deteriorated over the past decade to such an extent that investment by the private sector has weakened considerably while investment by the “mostly bankrupt” state-owned enterprises (SOEs) has also been in a steep decline, with regular announcements of further cuts in capital expenditure.

It said investment by government is adversely affected by a weakened fiscus, structural imbalances with a greater portion of the budget spent on grants and salaries and wages, and higher debt-related expenditure.

This leaves less funding available for investment in more productive sectors of the economy, such as infrastructure, it said.

“While we are certainly encouraged by the president’s announcement that focus will be maintained on infrastructure expenditure, it must be noted that the government sector, excluding SOEs, contributed just 25% of total investment in construction in 2019 and [its contribution] has been below 30% since 2005.

“The rollout of mega infrastructure projects will deeply rely on the private sector to support the financial void, and considering the size and scope of these projects, will be rolled out over decades if not longer.

“With a R340 billion pipeline announced in various infrastructure sectors, we can probably realistically assume actual expenditure of around R30 billion to R40 billion per annum (10% of the current annual expenditure on investment in construction),” it said.

Projects

Industry Insight added that the government has launched two major human settlement projects in Gauteng since the announcement of the Economic Reconstruction and Recovery Plan and similar projects are planned in other provinces.

It said the R100 billion infrastructure fund has also approved a project pipeline for 2021, including the Student Housing Infrastructure Programme which aims to provide 300 000 student beds.

However, Industry Insight said the timeline for these investments is not clear, and again, “implementation will be an issue, given the ANC’s recent track record”.

Peter Attard Montalto, Head of Capital Markets Research at South African consultancy and research company Intellidex, said the Sona was broadly as expected and exceeded a low bar but there was an unfortunate element of excessive hype on non-energy infrastructure.

Delivery

Attard Montalto said there are deep problems with both ongoing delivery now and delivery due shortly.

He said current delivery on infrastructure is somewhat at odds with the sense of action everywhere, given that the experiences on the ground of banks and asset managers have been of deep frustration.

In addition, the fact the Infrastructure Fund does not exist as a pot of money but is a marketing wrapper around a wide and disparate set of actual and potential line department and lower levels of government appropriations on infrastructure, he said.

Attard Montalto said this all served to give a sense of the speech being divorced from current reality.

“This is a key risk, especially with the budget coming up. For instance, the references to infrastructure spend and the presidential employment stimulus plan can both fall flat quickly as the budget cuts spending on both.

“The positioning of the Lanseria hub as a new ‘smart city’ is very interesting. This is one of the few infrastructure projects that is progressing through force of personality, yet it is hard to see it [being] replicated.

“A propensity to look at ‘job opportunities’ rather than ‘job years’ however continues to cloud a sensible discussion of infrastructure impact,” he said.