Nowhere left to hide for construction sector as money runs out

One of the biggest casualties of the government's rising indebtedness is the construction industry, says top construction industry market intelligence analyst Elsie Snyman.

For the local engineering sector, the future has seldom looked more desperate.

Snyman's company, Industry Insight, recently found in a survey that the confidence of consulting engineers has plunged to its lowest level since the global financial crisis of 1998-99.

Consulting engineers have traditionally been more optimistic about prospects in South Africa than the rest of the industry, she says. So when they lose hope, it's an indication of serious trouble.

"Confidence in the consulting engineering sector is a very important indicator as to what is going to happen in the contracting industry," she says.

The figures are stark: in as little as a year, satisfaction levels in the sector have plunged from 87% to 46%.

"The fact that they're becoming increasingly negative is very discouraging. That tells us that irrespective of the issues affecting construction on the ground, we're now starting to see projects that are in the pipeline drying up," she says.

A couple of years ago, almost 100% of firms said they were looking for engineers; now less than half are. Order books that were looking "quite healthy" a year ago are now looking "dismal", says Snyman.

Until now the challenges faced by the industry have been about management issues, skills shortages, the awarding of contracts and corruption, and they've been surmountable. Now it's about money. The government doesn't have any, the provinces don't have any, and municipalities don't have any.

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"We've finally come to the point where funding is a serious constraint. It's no longer a problem of management, skills and all the other things. It's become a financial problem. Funding simply is no longer available.

"We've run out of places to hide," she says. "South Africa has to face the harsh reality."

The National Development Plan is "the best thing that has happened to the construction industry since 1994 because of its very high infrastructure development focus", she says.

But the expectations triggered by its launch have failed to materialise.

"A lot of NDP projects are in the planning phase, but I think we're going to see a delay in getting to the next phase. Because that means coming up with the money."

The civil construction industry is a major job creator. Snyman estimates that about a million people earn an income from it and about 450000 people are directly employed by construction companies.

So a shrinking industry, which is what we'll be seeing as companies lay off staff and move offshore, will have dire employment implications, not to mention the implications for skills development. Snyman, 45, an economics, business and industrial psychology graduate from Rand Afrikaans University (now the University of Johannesburg) who has spent most of her career analysing data in the construction industry, says the industry has been "standing still" since 2009.

"The outlook now is that we're going to go into a negative growth phase. There is a very strong chance of this."

Skills Gap

There has been a concerted effort by the bigger construction firms to encourage school leavers to go into the industry to plug the skills gap. Snyman estimates that the number of engineering students at university has increased by between 30% and 40% as a result.

"But now where are they going to go?"

For a number of reasons, much of the government work that used to go to the bigger, more established companies is going to smaller companies.

"A lot of the medium-sized companies are being used by local government," she says.

In part, this has something to do with government procurement policies that place more emphasis on price than quality.

Smaller companies without the capacity or a track record equal to the larger companies make unsustainably low bids to win contracts. When they find they can't deliver at the bid price, projects are either left hanging or completed shoddily.

Even those that do a good job are too small to carry cash-flow delays. When payments from local government are delayed, as is increasingly happening as they run out of money, projects are abandoned and the companies are put out of business.

In response to the government's focus on price, the Construction Industry Development Board developed a register of contractors graded according to the size of project they're qualified to handle, "so employers can go on price without worrying if the contractor has the skills", says Snyman.

But local authorities award contracts to companies that are not on the database, or give a R60-million contract to a company that is only graded for projects up to R10-million.

"We're continuously finding examples," she says.

The result is that "the awarding and re-awarding of contracts is often mentioned, which raises the question of why these contracts were awarded in the first place".

Corruption, she says, is often the answer.

Fewer consulting engineers are being used by financially strapped municipalities to draft projects because they're considered too expensive. If local government skills levels were higher they wouldn't be needed, but local government technocrats do not have the right skills and so projects are botched.

"This is a major complaint from the consulting engineering industry. Municipalities say their price is too high, but the long-term cost of not involving them at the start of projects is, of course, much higher."

The process of squeezing out the big companies is also a legacy of the collusion scandal, she says. It led to ongoing distrust on the part of the government.

She says this is "very sad and unfair" because the culprits have long since left and the industry has mended its ways. It is also very short-sighted.

"South Africa cannot afford to lose them," she says.