Construction sector trends

Greg Ker-Fox, PwC associate director: Capital Projects and Infrastructure, gives a broad overview of some of the key trends affecting the infrastructure construction industry over the coming year.

greg2Bridging the gap in essential infrastructure
Iamge credit: Ngage Media Zone

The major players in the South African construction industry, with the exception of WBHO, are in a weaker position than a decade ago. This makes them potential acquisition targets. An example is German company Aton’s hostile takeover bid for Murray & Roberts. The result may be consolidation in the market, reducing competition. Another alternative could be the entry of foreign heavy construction companies into the South African capital project and infrastructure markets, with the resultant outflow of revenues from our economy.

Bottlenecks in the public sector

In the public sector, poor planning, cumbersome procurement processes and contracting up to appointment stage contribute to low levels of capital expenditure by provinces and cities. Project execution management is at a low level of maturity in many cases. Poor execution of infrastructure projects results in cost overruns, delays in completion, and the performance of the asset not meeting expectations. Stakeholder engagement, and particularly at local community level, requires more attention as community resistance and challenge are the causes of many project delays. 

The quality of overall infrastructure in South Africa is ranked 72nd out of 137 countries by the World Economic Forum (WEF). This is roughly in the middle of the spectrum. Backlogs remain significant across water, housing, transport, and the electricity network. This is being compounded by cutbacks in budget allocations for infrastructure, coupled with significant underspending on capex, particularly in the municipal environment. Institutional uncertainty, capacity, lack of integrated planning, ineffective pricing strategies and funding models have all contributed to the problem. Private sector spend in mining, real estate, and renewables is showing improvement with recent developments.

Greg Ker Fox Web

Greg Ker-Fox is a project portfolio risk management specialist within the Capital Projects and Infrastructure practice of PwC’s Advisory business. He holds a bachelor’s degree in civil engineering, master’s degree in technology management, and doctorate in project risk and reliability. Ker-Fox has been actively engaged in project and portfolio risk management for 20 years, working for Murray & Roberts and then PwC as an associate director.

 

Infrastructure implementation

Challenges in implementing infrastructure spending include political leadership alignment between government departments, long-term planning, procurement processes, project management, and in some cases, the need to inject private capital. As Treasury indicated in its 2015 Public Sector Supply Chain Management (SCM) Review, SCM in the public sector is highly fragmented with little to no coordination, and there is a skills shortage among the individuals tasked to manage and oversee the full SCM process. There is no shortage of project ideas or needs. The challenge lies in converting these ideas/needs into business cases that are bankable. That includes: defined benefits, costs, ability to fund, procurement and execution and, importantly, the sustainability of their operation and maintenance. Choices around which projects to prioritise given limited capital, should be based on rational analysis — but often past beliefs and perceptions, organisational influence, and political pressures carry more weight.

“Data from Statistics South Africa shows that fixed capital productivity has declined over the past five years, meaning that the economic benefit is likely to be lower than this.”

Infra’s business case

There is a strong relationship over the long term between infrastructure spend and economic growth. In South Africa, PwC estimates that every R1-million spent on construction activity translates into an additional R0.22-million in GDP and the creation of almost three jobs. However, this presupposes that the spending is on the right infrastructure and having the desired catalytic or enabling effect on the selected economic sector(s) and spatial areas. This requires effective planning, coordination, and foresight. Data from Statistics South Africa shows that fixed capital productivity has declined over the past five years, meaning that the economic benefit is likely to be lower than this.

The Codes

Gazetting of the Construction Code in December 2017 brought some certainty to the process, with limited changes from the version tabled for public comment in 2016. The construction industry and public sector investment in infrastructure creates significant opportunities for black-owned SMEs. However, shareholders of smaller construction businesses may not have the appetite or capacity to raise the required bonds and guarantees to deliver major infrastructure projects and fund working capital. This poses a potential challenge for delivering large-scale projects, where there may be multiple work packages delivered by smaller firms but no large EPC contractor available at the centre to provide the overall management, integration and risk management or mitigation. 

Infrastructure backlog

The City of Johannesburg as an example, has stated that they have an infrastructure backlog of R170-billion, while Tshwane and Ekurhuleni would show backlogs of similar orders of magnitude. Private investors perceive risks associated with political instability, policy uncertainty, land expropriation without compensation, unionised labour demands, accountability, transparency, and bureaucratic obstacles. For example, when dealing with construction permits, South Africa is ranked 94th out of 190 countries by the World Bank. Clearer intent on sector development and reforms would guide the private sector to opportunities for investment and expansion given a better understanding of the ‘rules of the game’. Public entities and SOEs should also provide robust and realistic planning at the asset class or sector level. Bottlenecks created by procurement and contracting functions must be resolved.


 

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