The construction sector in South Africa faced an exceptionally challenging 2017, reaching 17-year lows; however, it remains one of the economic engines of the country.
The construction sector holds immense potential for advancement of the country’s general financial wellbeing, says Bryte Insurance specialized property division national head Juan-Pierre Holmes.
Bryte publishes a yearly construction activity monitor, which analyses long-term insured construction projects data within the market and provides a high-level overview of activity within the sector.
It also measures, on a quarterly basis, the change in insured construction projects undertaken by small, medium-sized and large construction entities.
Holmes explains that, in relation to gross domestic product, the National Treasury’s public-sector infrastructure spend – the greatest funder of construction activity in the country – continues to support economic expansion, diversification and competitiveness.
Financial analysts stated that National Treasury reported that over the four years from 2014/15 to 2017/18 this will amount to 6.2% of gross domestic product (GDP), slightly down from 6.7% of GDP over the five years from 2009/10 to 2013/14.
The trend remains constraining to the construction sector and lends itself to a need for greater private sector investment.
However, Holmes notes that overall efforts by government to stabilise the national economy are a good sign for key economic sectors such as construction.
“The proposed budget of more than R800-billion allocated for public infrastructure development, including an additional 25% for power to the constrained current electricity grid, expansions in the public transportation sector and road upgrades and upcoming development of healthcare facilities and school projects, will ignite vital growth within the sector.”
The muted construction activity in 2017 is also depicted by the challenges facing construction companies, with consolidation within the sector being a growing trend.
Four of the top six largest construction companies in South Africa lost between 50% and 70% of their share price value in 2017. Holmes attributed this to a lack of business confidence, which dropped to a record more than 30-year low, largely owing to political and policy uncertainty, especially around the revised Mining Charter and contraction of economic activity.
“Construction companies have pointed out issues that impact their business, including decline of profit margins. To be more competitive and to maintain profitability, companies have [also] had to relook methodologies of construction and types of technologies they have had to use,” Holmes remarks.
He adds that construction costs were also on the rise in 2017 especially. Construction costs are driven by devaluation of the rand, the oil price, labour costs and labour unrest on site, as well as longer-term impacts including socioeconomic stresses in South Africa.
“The policymakers were slow to respond; however, there has subsequently been an upbeat feel since President Cyril Ramaphosa’s appointment and there is an anticipated air of opportunity from European, US and Australian investors who have shown a keen interest in investing into major construction firms in South Africa.”
In terms of the land reform talks that could again impact on foreign investment, Holmes believes South Africa is in a holding pattern. “The outlooks are positive, but everyone is waiting to see what happens and whether policy certainty realises.”
Meanwhile, Holmes suggests uplifting the construction sector will involve meaningful integration of physical and digital technologies (which is the basis of the Fourth Industrial Revolution), while adopting enabling technologies for operational and cost efficiencies is also a key ingredient.
He further suggests that companies should seek the expertise of risk management professionals to thoroughly map out exposures and present holistic solutions.
“Some businesses are highly price sensitive; however, the danger of seeking the lowest cost could be contending with costs that are multiples higher for uninsured/underinsured projects – in the event of a claim – as well as the knock-on effects of the loss.”
Additionally, Holmes says empowering the youth to address the increasingly apparent skills gap within the sector must also be a priority. “On-the-job training and other skills development opportunities need to become more widely available to the future leaders of our country.”