MOHAU MPHOMELA: Construction sector clings to hope that infrastructure projects will be fast-tracked

Following a harrowing two years for the construction sector, 2022 started with cautious optimism amid promises that major infrastructure works would be fast-tracked. The value of building plans passed by larger municipalities in 2021 had risen 37.5% compared with 2020, which had seen a decline of 33.5% on the year before.           

It was anticipated that the economy would rebound in 2022, with an expansion of 9.1% predicted in real terms. The sector hoped that if this was the case it would be possible for the industry to stabilise at an average annual growth rate of 3.1% between 2023 and 2025.

Unfortunately, those forecasts were set back by factors such as the unsettled geopolitical climate, with the Russian invasion of Ukraine disrupting global markets more than anticipated. By the end of the second quarter of this year Stats SA described the construction sector as being in the worst shape of all industries in terms of GDP real value added recovery from the effect of the Covid-19 pandemic, at 24% smaller than it was before the pandemic. In September the industry was still contracting at 2.4%, with civil infrastructure projects increasingly delayed.

Profit margins were weaker and turnover contracted 9.8% year on year (in nominal terms) to R72.4bn in the first quarter of 2022, though smaller enterprises bucked the trend by almost doubling their turnover. Construction material costs have surged above the inflation rate, while a competitive market has further eroded profits in the sector.

At the same time, liquidations continued, accelerating in the second quarter and increasing by 183% year on year, with the construction sector shedding 13,000 jobs between March and June. Only a handful of major construction companies are still trading. The others have diversified, gone out of business or are in business rescue.

On the brighter side, the industry has recovered somewhat from the dip experienced during the lockdowns. Though commercial building activity slowed this year, during the period June 2020 to May 2021 building plans were registered to the value of R6.3bn a month on average, while during the same period a year later the monthly average was R9bn.

Greater risk

With margins in single digits and few major projects under way, contractors are managing to achieve some growth in the residential and commercial markets.

Unfortunately, while more of these projects are becoming available, unethical practices and the spread of “tender mafia” activities are threatening profits and putting smaller contractors’ futures at risk.

The Bargaining Council for the Civil Engineering Industry (BCCEI) has stated that intimidation, extortion and violence on construction sites has reached crisis levels, causing losses of over R40bn by 2020. As far back as 2019 it was reported that at least 183 infrastructure and construction projects worth more than R63bn had been affected by these disruptions across the country, according to a report by the Global Initiative against Transnational Organised Crime.

Late payments and unethical business practices, such as amending contracts or forcing contractors to assume disproportionate risk, are further eroding profits and putting the sector at risk.

While there are some grounds for optimism, contractors need to be cautious. Our government is aware of the sector’s challenges — the Master Builders Association has communicated with it at both the Construction Alliance SA and Master Builders Association SA level.

Infrastructure

The sector’s big hope for recovery rests in the infrastructure development plan, which has been slow in coming to fruition. With R6.6-trillion in cumulative spend required by 2030, the government continues to insist it plans to invest heavily in transport, energy, residential, telecommunications and industrial projects.

In particular, the construction industry will be underpinned by the investments associated with the government’s infrastructure plan. However, based on past experience, it seems inevitable that these projects will not unfold as planned and that tenders will take time to materialise and be adjudicated.

Two years ago the Master Builders Association North welcomed the announcement that 88 investment-ready projects had been identified by the presidency’s infrastructure and investment head, Kgosientsho Ramokgopa, and public works & infrastructure minister Patricia de Lille, but we noted that time was running out to turn these plans into reality.

Progress has been slow since then. Standard Bank reported in May that almost a quarter of the country’s R340bn strategic infrastructure projects had been delayed or put on hold.

The Master Builders Association North stands ready to work with the government to implement these plans, though we note that ongoing delays will further reduce our ailing sector’s ability to deliver on these ambitious projects.

• Mphomela is executive director of the Master Builders Association North.