South Africa’s construction sector has experienced a decade of considerable growth and success, particularly as a result of the buoyant property market and the government’s considerable infrastructure spending in the mid- and late-2000s. The global recession has, as in most sectors, put a dampener on that growth. Despite the recession, however, the imminent kick-off of the 2010 Soccer World Cup has sustained a number of construction companies over the past 18 months, with demand for stadiums, new transport infrastructure and World Cup accommodation. As we approach the World Cup and start slowly emerging from the global recession, how is the South African construction industry likely to fare beyond 2010?
In November last year, KPMG released its Global Construction Survey 2009 and it noted the surprisingly positive outlook among those surveyed. The survey was conducted among 108 senior leaders – many of them CEOs – from 30 countries around the world, including South Africa. A total of 64% of those surveyed expected to maintain or increase profit levels by mid-2010. To add to this, about a third of respondents decided not to cut their workforce during the recession. This can partly be attributed to the fact that many construction companies have battled to find enough high-quality employees in the first place and were therefore hesitant about depleting their valuable human resources.
The survey went on to point out that the construction industry managed on the whole to avoid some of the worst effects of the depressed demand during the recession because many construction contracts and projects are of a long-term nature.
In South Africa, specifically, the construction industry showed particular resilience during the recession, being one of the few sectors to increase its contributions to GDP between the second half of 2008 and the same period in 2009. In the 3rd quarter of 2009 the construction sector increased its contribution to unadjusted GDP by 8.4% from 2008, while in the 4th quarter the sector increased its contribution by 6.9%.
These positive results have, however, been tempered with setbacks such as the debt crisis in Dubai, which has resulted in a number of cancelled projects for South African construction companies. Group Five alone had to cancel as much as R4-billion worth of contracts. There have also been some other cancellations in the Southern African region where numerous South African construction companies operate, as both public and private funds dried up during 2009. Part of the Murray & Roberts Group in the SADC region, Wade Walker, had the Kolwezi Project in the Democratic Republic of Congo suspended.
The KPMG report did, however, focus on some of the more prominent construction companies. Smaller construction companies suffered more than most as the number of projects and contracts became depleted due to shrinking global and domestic demand.
These smaller companies are now competing furiously for fewer construction contracts. The same sorts of strategies over the coming months should also be followed by these smaller firms. They should hold onto their most valuable human resources and plot new strategies for growth by, for example, examining innovative ways to cater for sustainable and energy-efficient contracts and projects.
The future for the larger construction companies at least is looking positive with most still having large order books. Murray & Roberts' order book stood at R44-billion on 31 December 2009; WBHO’s order book was at R13.1-billion at the beginning of this year; Basil Read’s order book was at R8-billion in December 2009; Aveng’s order book for the group’s construction business (largely made up of Grinaker LTA) stood at R32.7-billion on 22 February this year; and Group Five’s order book stood at R11.6-billion on 30 June 2009.
The construction industry is crucial for the South African economy, particularly as an employer. According to Statistics South Africa there were about 430 000 people employed in the construction sector in the third quarter of 2009. As shown earlier, the construction industry has played a significant role in the South African economy’s recovery over the past six to eight months.
The construction industry has a good track record of working with the public-sector. Not only are there countless state-sponsored infrastructure projects that have required the services of private construction companies, but the industry as a whole worked for many years with government to draw up the Construction charter, which was signed in 2006 and became law in 2009. It was the first sector to have its charter become law.
It is also clear that government spending on infrastructure is likely to continue. In his 2010 budget speech, Finance Minister Pravin Gordhan outlined plans to spend a large amount on infrastructure over the next three years. As Mr Gordhan noted, 'Public-sector investment is a crucial component of development as it provides the infrastructure through which we transport goods, power the economy and connect households and businesses to services and markets. Over the next three years, the public-sector aims to spend R846-billion on its infrastructure programme. Extensive planning and consultation is in progress on infrastructure programmes for the next 10-20 years, in recognition of our long-term development challenges.'
According to Malcolm Lobban, CEO of Sanyati – a JSE listed construction company – about R160-billion to R220-billion is likely to filter down to the construction industry. A number of experts have, however, noted that it is unlikely that government will spend this full amount within three years and therefore that construction companies should remain cautious in their outlook.
In looking ahead, the construction sector needs to take several factors into account. Firstly, they should examine new avenues for growth in the future. Secondly, they should create the capacity for those new avenues by recruiting the relevant talent or training current employees. It is increasingly likely that new technologies that are developed to address sustainability, energy efficiency and the impacts on climate change will become a key growth area.
The issue of delivering environmentally sustainable construction services also featured prominently in the KPMG report. Respondents to the survey noted that although being seen as a ‘green’ company did not win any business, the lack of it could cause a company to miss out on new business. The report went on to note that in a world where environmental issues are gaining more and more traction, the development of a environmentally sustainable approach would be a wise move.
It is also important in South Africa to stay up-to-date and in touch with the public sector so that construction companies can benefit from the large amounts of public spending on infrastructure. In Murray & Roberts' iterim results release on 24 February, it noted the lack of private-sector demand, making public-sector projects all the more important. WBHO’s CEO Louwtijie Nel has noted that WBHO is cautious about the future and the company foresees the sector taking 12-24 months to return to reasonable levels of business. He also noted that this period would be a struggle for the industry and all players would have to be more competitive.
As with most sectors in South Africa, the construction industry will hope that domestic demand begins to rise and that the exposure created by the Soccer World Cup increases business interest in South Africa, thereby creating new opportunities.
