RONNIE SIPHIKA: SA’s construction industry faces leadership and profitability crisis

We are going nowhere fast. The government is disorganised, and the SA construction industry and the clients that rely on it are at a critical juncture. Perhaps right now could be the time to review the seriousness of the outlook. The same deep-seated problems have existed for many years and are well known and rehearsed by most industry associations, yet despite that there appears to be a collective reluctance or inability to address these issues and set a course for improvement.

One of the mandates of the department of public works and infrastructure is to provide competent leadership to the SA construction and property industries while ensuring their transformation and regulation. While distinct but related to the role of the government in general, the highly fragmented nature of leadership and decision-making in the industry has become a serious problem that requires attention. There is no single large scale body that represents both industry and clients — public and private — across all types.

While there have been attempts to form such organisations, such as the SA Property Owners Association (Sapoa), Construction Alliance SA (Casa) or Black Business Council in the Built Environment (BBCBE), their focus almost always becomes narrow and more focused on the commercial interests of their constituency, be it employers, contractors, consultants, suppliers or commercial property owners.

While Casa might be an exception as attempts have been made to align divergent interests, there has essentially been a lack of joined-up strategic thinking that brings together government, clients, major contractors, specialist contractors (across both building and engineering) and relevant professional bodies, including regulars such as the Construction Industry Development Board.

A more recent development has been how the small and emerging businesses with the industry have organised themselves as business forums in local communities. Even the phenomenon of the “construction mafia” has emerged in SA to describe groups of people, ostensibly business forums comprised of emerging contractors from local communities, who demand a share of construction contracts by employing illegal and disruptive methods. This issue has become quite serious in recent years and has had a significant effect on the construction industry.

The focus to date has been on leveraging the government’s role as a client through adoption of best practice and attempting to influence wider and priority policy adoption such as BBBEE, preferential procurement, local content requirements and professionalisation. However, the government’s role as a client is itself fragmented, with different implementing agents at national, provincial and local municipal level across a range of economic and social infrastructure, including transport, hospitals, schools and housing.

Despite a large infrastructure led pipeline through the new created Infrastructure SA (ISA), which was led by the current electricity minister Kgosientsho Ramokgopa, about 75% of all output is not in government’s direct control and there is not enough co-ordinated engagement with private clients of the industry, including real-estate developers, investors, developing occupiers and to a large extent housebuilders. This is a structural issue that limits the ability for overall strategic change to be achieved other than in pockets, often in isolation from other parts of the construction sector. Unless the whole spectrum of private and public clients are involved in effecting change, it is suggested that the industry will not be able to transform itself in response to client demand changing.

Directly linked with the issues of leadership and fragmentation discussed above is the nature of the commercial returns model seen across industry. The high level of insolvencies and financial failures of major JSE listed firms in the industry over the past 15 years since the 2010 World Cup continue to indicate that blended margins, especially when viewed on a long-term trended basis across economic cycles, are thin relative to many other industries, such as financial services, agriculture and automotive. Low profitability is a long-standing problem for the industry and is not unique to SA. The industry as a whole is underachieving and invests too little in capital, research and development and training. In the coming years the financial position of major firms remains uncertain despite the industry emerging from recession.

During periods of growth such as the build programme towards the 2010 World Cup, some parts of the industry’s supply chain — such as materials, plant and equipment suppliers — saw a substantial increase in profit margins. This is typically because there's a high demand for their specific goods or specialised type of services that required the expertise of major contractors and not enough supply to meet it. However, this temporary profit boost doesn't change the longer-term profit structure, especially when you consider times when capacity isn't fully used and the risk of financial loss. Such losses can occur due to fluctuating market prices for their input materials or due to failures in delivering their products or services after setting a price.

The use of competitive tendering is widespread throughout the industry and there appears to be low usage of more collaborative and integrated design, procurement and construction delivery models promoted elsewhere. Clients tend to fixate on lowest initial tendered price, and this is often perpetuated by consulting firms, which in a traditional procurement model are implicitly employed (at least partly) to manage a fixed and adversarial transactional interface between clients and industry.

The least cost-based procurement model often hinders the ability to focus on value, outcomes or performance if appropriate weightings are not made. Adoption of more collaborative or incentivised commercial engagement models appears could be more suited to clients such as Transnet, Eskom and Sanral that have either large-scale infrastructure projects or a delivery programme where longer-term outcomes and benefits are driven by harnessing process improvement and distributing the benefits of large-scale demand that can be committed to with a reasonable degree of certainty.

The reality is that many clients, especially with government departments, municipalities and smaller state-owned entities that are simply conditioned to operating in an adversarial and hostile way with industry, do not see a case to move to more collaborative and integrated approaches for fear that a lack of commercial tension will affect their own financial outcomes.

• Siphika is CEO of the Construction Management Foundation.