Industry growth depends on government contracts – risk analyst

7th June 2013 By: Gia Costella

The growth of the South African construction industry is dependent on government contracts and timeous payments for those services, says credit insurance solutions provider Coface.

“Confidence in the industry has remained relatively constant over the past few quarters, marginally increasing in the fourth quarter of 2012. This signals the somewhat hopeful perspective of the industry.

“However, sentiment is still predominantly negative, as the majority of small and medium-sized contractors have yet to benefit from the promised increase in government spend on infrastructure devel- opment, with more than R1-trillion in planned investment in infrastructure projects over the next eight years,” says Coface risk analyst George Marais.

He adds that there is no certainty about the financial benefits of these initiatives because the perception exists that payment for work rendered remains slow.

This, he says, places additional pressure on contractors’ cash flow, resulting in a higher risk of payment defaults. It also restricts smaller contractors from tendering for further government contracts.
“The largest contributors to government’s infrastructure capital expenditure over recent years have been State-owned power utility Eskom and State-owned transport utility Transnet.

“Transnet’s multiproduct pipeline from Durban to Heidelberg boosted construction work over the past few years and Eskom has spent extensive amounts of capital on the Medupi, Ingula and Kusile power stations.

“The completion of these major projects means the market will be flooded with construction workers looking for work in late 2013 and 2014,” states Marais.

He notes that the increased number of construction workers and a lack of demand for construction projects have resulted in increasing competition among firms, while profit margins are down to almost nothing. Only larger firms can afford to function at lower margins for long periods.

However, Marais says this reduction in profit margins is not only because of increased competition. “Increased input costs are another factor affecting the market,” he states.

Marais points out another consequence of this situation; industry is more focused on contract labour than formal employment, resulting in a lack of sustainable job security, which translates into a decline in consumer confidence in the industry.

Coface expects costs in the construction industry to continue increasing at an average rate of 7% in 2013.

“A possible solution to the oversupply of labour, which requires job creation opportunities to be pursued, could be for government to revise the method of imple- menting budget handouts at municipal level,” says Marais, adding that figures indicate that only 72.5% of the total capital budget was spent in 2012.

This resulted in R12.8-billion not being used.

Further, he notes that the Department of Public Works (DPW) recently urged the construction industry to deal with fraud and corruption, owing to its negative impact on the industry.

“The announcement was made in light of the launch of the National Contractor Development Programme (NCDP) in December last year, which involves a partnership between the Construction Industry Development Board and the national and provincial departments of Public Works,” explains Marais.

The DPW has committed to making resources available to help develop previously disadvantaged contractors and aligning individual contract development programmes or initiatives with the principles set out in the NCDP framework.

“The NCDP is seen as a good response to the concerns raised by policymakers, contractors and development agencies. It provides guidance on the implementation of contractor development programmes, coordinates implementation and provides a reporting framework for monitoring and evaluating these programmes.

“It also provides access to mentorship, financial support, information and any other support relevant to contractor development,” says Marais.

The DPW has challenged contractors to be better organised and take advantage of the opportunities provided by govern- ment, which is evidence of commitment to developing contractors and providing them with opportunities for growth, he says.

“The delay in rolling out these plans could be attributed to the nature of administering and implementing them. This incudes distribution from national to municipal level, municipal tender processes, tiered production-payment schemes and subcontractor reimbursements.

“Meanwhile, there is a specified amount of money awarded to municipalities each year, according to the infrastructure roll-out programme. If a municipality fails to spend its budget in the allocated time, the funds are returned to the National Treasury. As the next period’s budget allocation is dependent on the previous spend, that municipality’s budget will be reduced for the next period,” explains Marais.

He notes that slowed performance in the second half of 2012 was influenced by intense competition for contracts and low margins, especially in the roads sector.

Shortages of bitumen, a key ingredient in the production of asphalt, compounded the situation.

“Not enough time and funds were allo- cated by government for the maintenance of existing infrastructure in the past and, as a result, the cost of replacing these structures far outweighs the accumulated maintenance costs,” Marais concludes.