The boom in sub-Saharan infrastructure construction is set to continue to provide investment opportunities across transport, power and industrial construction in 2017, says BMI Research, a Fitch company.
Economic growth in sub-Saharan Africa in 2016 dipped to its lowest rate in almost 16 years, the BMI Research report says. But the outlook for the expansion of the construction industry is more positive for 2017.
Regional economies are dogged by logistical hurdles in transport and ports in particular, where China will continue to dominate infrastructure financing flows.
Other major investment in the continent’s infrastructure comes from Europe, Brazil, the US and SA. The report says East Africa probably offers the most growth potential due to a packed project pipeline.
It expects to see traction on regional power projects as markets look to capitalise on the power generation potential of neighbouring countries to help ease supply constraints.
Report author Marisa Lourenco, infrastructure analyst at BMI Research, says the research highlights the development of a standard-gauge railway link for key regional economies Kenya, Uganda, Tanzania and Rwanda.
"We see scope for the progression of the [railway] over 2017, despite the potential for delays to the start of construction," she says. But she also says a lack of transparency in the tendering process and incomplete environmental and social impact assessments have stalled the project. This is commonplace in construction activities throughout the world.
Such major infrastructure developments spur higher demand for cement. This should help companies such as PPC, SA’s largest cement group, which is betting that African revenues will make up nearly half of all future earnings as African governments seek to replace imports.
In November 2016, global consultant PwC published its fourth annual evaluation of performance and risk in the South African construction industry.
At the time, significant changes were taking place in the sector, particularly in respect of an industry-government settlement agreement.
In October, Murray & Roberts became the seventh major JSE-listed construction and engineering group to join a voluntary payment scheme that would see R1.5bn put towards black economic empowerment of the sector over 12 years.
Along with Group Five, Wilson Bayly Holmes-Ovcon, Stefanutti Stocks, Raubex, Basil Read and Aveng, it says the main aim of the agreement is to strengthen ties between the sector and the government and to develop a transformed and inclusive construction industry.
The PwC reports says the construction industry is a significant contributor to employment and growth in SA, but it has been in a deep slump since 2009.
This has been made worse by the poor economy in 2016, leaving margins of many companies under pressure amid tight liquidity and decreasing order books, especially operations based in SA.
To this end, Murray & Roberts recently exited South African infrastructure and building markets, selling its domestic operations to a black economic empowerment consortium led by the Southern Palace Group for R314m.
The group will now focus on three multinational business platforms providing services to oil and gas, metals and minerals, and power and water markets.
PwC says there had been some improvement in the performance of domestic construction companies as 2016 drew to an end.
However, it also says the government’s R4-trillion infrastructure plan requires input from, and coordination with, the local construction sector for it to be successful.
Leading JSE-listed construction groups, such as Group Five and WBHO, now derive much of their turnover and profit from Europe and Australasia. They also operate extensively in the sub-Saharan region of Africa.
Lourenco says BMI Research is forecasting regional infrastructure expansion of 4.8% in real terms over 2017, from 3.7% in 2016, keeping sub-Saharan Africa in position as the third-fastest growing construction market globally.
"This comes [with an] improvement in the outlook for the region’s largest construction market, Nigeria," Lourenco says. The country comprises about 25% of sub-Saharan Africa’s total construction industry value in nominal dollar terms.
After recording the highest construction growth rate globally between 2011 and 2015, the region slipped in 2016, trailing the Middle East, North Africa and the Asia-Pacific region.
More recently, the Nigerian construction market suffered terror attacks at the same time as oil prices fell to rock-bottom, pushing the country’s economy into recession.
"Overall, the report high-lights that the improved outlook for the commodities price environment in 2017 will provide supportive dynamics for the expansion of the sub-Saharan Africa construction industry," Lourenco says.
Ernie Lai King, who heads the Johannesburg tax department and the African-Asia practice of law firm Hogan Lovells, still sees SA as the market leader and driving force of Africa’s economic growth.
In the mid-term, the country is expected to continue benefiting from regional integration as multinational companies including Chinese enterprises, invest in the continent.
"However, increased infrastructure investment — especially in power and railways — and improved economic efficiency and governance capability
within the public sector are urgently required," Lai says.