The government’s chronic inability to put out to tender successfully and implement infrastructure projects, from fixing pit latrines to national highways, has battered SA’s construction industry, causing it to shed 25% of its workforce over the past five years.
The state’s persistent underspending on its capital budgets is also the primary reason so many municipalities are unable to deliver even the most basic services to their communities.
“Forget about the proverbial frog in the boiling water that’s been getting progressively hotter. The frog’s fried and the water’s evaporated,” says Deon van Zyl, chair of the Western Cape Property Development Forum.
“[Government’s] inability to procure, let alone deliver on infrastructure is quite literally seeing our country collapse, physically and economically.”
Stats SA’s recently released 2020 construction industry survey bears this out. It shows that:
- There were almost 119,000 job losses (25% of all people in the industry) between June 2017 and June 2020. Many of these were in civil engineering companies;
- The industry’s total income dropped by 7% between 2017 and 2020;
- Its profit margin decreased from 3.5% to just 2.2% over the same period;
- In 2011, the construction of civil engineering structures was the largest contributor to the sector’s overall income (at 43%), but by 2020 its contribution had fallen to 29%; and
- Capital expenditure by the industry declined by 6.1% a year between 2017 and 2020.
When overlaid with Stats SA’s data on government capital expenditure, it is clear that the big driver of the construction sector’s decline has been a precipitous drop in public sector infrastructure spending.
It has declined each year, from a peak of R193.7bn in 2016 to R116.43bn in 2020 — a 40% (R77bn) drop in five years.
Public corporations were the main culprit. Their capex on new construction works peaked at R83.19bn in 2016 and has been on a downward slide ever since. It roughly halved in five years, totalling just R41.38bn in 2020.
But all parts of government are to blame. National government capex on new construction works declined from R7.9bn in 2017 to R4.6bn in 2020. Provincial capex dropped from R24.1bn to R14.1bn, and municipalities’ capex from R52bn to R45.4bn over the same period.
“In the construction industry, government — and government alone — has caused joblessness, homelessness and bankruptcy upon bankruptcy,” says Van Zyl. “Not the pandemic. Not the poor rand.”
In 2020, the National Planning Commission released a scathing report on the state’s continued failure to deliver infrastructure within budget and on time. It blamed the crisis on a critical shortage of professionals with built-environment skills and experience across all spheres of government.
This lack of in-house technical expertise resulted in an inability to plan, specify, contract and procure infrastructure, as well as an inability to ensure that the work was done to an adequate standard, or to maintain the infrastructure afterwards, the report found. Overly bureaucratised procurement processes were also to blame.
The upshot was that underspending became the order of the day, with public entities having spent no more than 65% of their capital budgets on average between fiscal 2015 and fiscal 2017.
The state of SA’s infrastructure had deteriorated to the point where it posed a “serious problem” for the economy, the report concluded, with sanitation facilities in very poor condition, many paved provincial and municipal roads at risk of failure and gravel roads unfit for purpose.
Forget about the proverbial frog in the boiling water that’s been getting progressively hotter. The frog’s fried and the water’s evaporated
— Deon van Zyl
Werner Jerling, CEO of Asla Construction, a medium-sized Cape Town-based private construction firm that does mostly government work by direct tender, says conditions in the industry are “very tough”, with firms competing for a shrinking pie.
He is frustrated by the slow pace of government procurement, officials’ lack of accountability over failed projects and cancelled tenders, and their lack of understanding of the economic costs this imposes on the country.
His life is made harder by the construction mafia — gangs of criminals who run extortion rackets, barricading construction sites while demanding a slice of government projects. Some staff have been attacked and even hospitalised; others have chosen to emigrate.
Though his company has successfully interdicted some wrongdoers, he says pursuing cases through the courts is a hugely onerous and expensive undertaking, especially for small firms.
“We’re at breaking point — it’s either all going to fall down or we’re going to pull out all the stops,” he says. “My biggest appeal is that the government and the industry get closer together to solve the problem. We can create jobs quicker than any other industry but there are so many opportunities that we’re just losing out on.”
John Matthews, chair of the Construction Alliance of SA, laments that SA has become “a maintenance state”, in that the focus is on just maintaining the status quo when what is required is infrastructure spending on a huge scale.
“Nobody in government understands that if you want new growth, you must be a pro-growth government,” he says. “It takes five years to get a big job off the ground because of all the red tape. Officials are concerned with ticking boxes, not in creating conditions conducive to employment.”
Just take the SA National Roads Agency Ltd (Sanral) debacle. The Development Bank of Southern Africa has been put in charge of certain Sanral procurements after it caused an uproar by cancelling tenders worth R17.5bn in May due to alleged procedural irregularities, two years after beginning the process.
Sanral has told the industry it will award the new tenders by the end of September — an undertaking Matthews considers highly implausible, given that it reissued them only in July.
“I do believe that all three tiers of government have failed us in terms of unlocking delivery and enabling employment,” he says.
“They talk about a ticking time bomb, well the time bomb’s here.”
The construction industry is on its knees due to years of state underspending on infrastructure. For some firms being left to battle the construction mafia is the final straw
— What it means:
On a more positive note, Nedbank’s list of capital expenditure projects for 2022 shows that the private sector has been driving a recovery in fixed investment over the past six months. This looks set to continue as many new renewable energy projects are likely to come on stream towards the end of the year.
The value of big, expansionary fixed investment projects announced rose to R267.6bn (annualised) in the first half of the year — a 24.6% rise from R214.7bn in 2021, and almost double the pre-Covid tally of R138bn in 2019, according to Nedbank.
The private sector was the major driver, accounting for 86% (almost R229bn) of all new projects with the electricity, gas and water industries dominating the field.
The biggest private sector project announced in 2022 so far is a R75bn green hydrogen plant at the Coega special economic zone. It will be supported by its own 2,200MW solar and wind power plant.
The value of government projects rose slightly to R37bn from R33.8bn in 2021, with the biggest new project being an R8bn, 524,000m2 mixed-use government district at Salvokop, Pretoria.
In contrast, public corporations’ plans declined sharply to just R1.8bn in the first half of 2022. However, this followed the announcement of R58.9bn worth of large projects by Eskom, Sanral and Transnet last year.
“After years of delays, we are now beginning to see some evidence of investment in essential economic infrastructure, particularly in energy, roads, and telecommunications,” says Nedbank economist Johannes Khosa.
“Though still not nearly enough to erase more than a decade of underinvestment, President [Cyril] Ramaphosa’s efforts to lift infrastructure ... are finally starting to materialise in tangible new projects.”
Nedbank expects gross fixed capital formation, which aggregates public and private fixed investment, to expand by 3.5% for 2022 as a whole — a big step up on the 0.2% increase recorded in 2021 and a significant improvement on the preceding five years of contraction.
It also expects a gradual improvement in fixed investment over the next five years, driven by pockets of activity. There should, for instance, be a flurry of new project announcements towards the end of this year and into next year as bid window 6 of the renewable energy programme is concluded.
While many are hopeful that Ramaphosa’s recent sweeping energy reforms could unlock faster growth in fixed investment and economic activity, Khosa warns that to achieve this, spending on infrastructure would have to be efficient, transparent and deliver quality assets on completion.
In the construction industry, government — and government alone — has caused joblessness, homelessness and bankruptcy upon bankruptcy,” says Van Zyl. “Not the pandemic. Not the poor rand
— Deon van Zyl
Nedbank doesn’t believe a broad-based fixed investment upswing is on the cards, warning that SA’s energy shortage could persist for at least five more years. It also fears the coming global economic slowdown will eventually tame commodity prices, which could convince some companies, especially in mining, to postpone capital outlays.
So, is there light at the end of the tunnel for the construction industry?
Van Zyl believes the Western Cape has the right approach in creating a new provincial department dedicated to infrastructure to ensure project delivery. The recent relaxation of Eskom’s procurement regime also suggests the message may be finally starting to hit home at a national level.
But he is not holding his breath.
“We either build ourselves out of the infrastructure crisis and, by implication, unlock our future — or we don’t, with the implications too ghastly to contemplate,” says Van Zyl. “Delivery and implementation are now the only option.”
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