The South African construction industry was particularly hard hit when the infrastructure development highs leading up to the 2010 FIFA World Cup were followed by a global recession and depressed growth, according to a recent survey of the construction industry by PricewaterhouseCoopers.
Statistics detailing the decline of the industry over the last three years have been well publicised. Reports indicated that in the fourth quarter of last year construction confidence rose to a new five-year high, with a recovery in construction activity and moderation in tendering competition. However, the balance sheets of major JSE-listed construction and engineering groups were still showing strain.
Construction industry under pressure, according to PwC
According to the PwC report the discrepancy between the performance of the construction index and the JSE all-share index is stark. Not only has the industry been punished for its lackluster financial performance in the down cycle, but also because of public perception following the Competition Commission process, findings and settlement.
It would appear that the cycle has bottomed out with a number of encouraging signs from the financial performance of individual companies, order book growth and public infrastructure commitments. However, there are still a number of risk factors that could impact the industry. Public sector infrastructure spending is normally a good indicator of the industry’s performance.
The SA government’s infrastructure development plan and the new Presidential Infrastructure Coordinating Commission (PICC), set up to coordinate infrastructure expenditure between the three different spheres of government, are positive signals for future growth in the industry.
After remaining fairly flat from 2009 to 2011, capital expenditure by public-sector institutions has increased by 11,7% since 2011, with total expenditure in 2012 amounting to R202 billion.
The scale of this increase may be misleading, as new construction work only increased by 3,5% to R137 billion while plant, machinery and equipment purchased increased by 55% to R38 billion. Nevertheless, when one takes into account that the 2011 increase from 2010 was 16,1%, the increase in new construction over the last three years has been real. However, it needs to be borne in mind that construction input cost inflation was also well above CPI inflation and that the effective growth rate from 2009 to 2015 shown on the graph is less than 6%.
Concern has been aired from various quarters about the government’s ability to roll out capital and infrastructure programmes, as well as the accuracy of capital forecasts. A comparison of actual construction expenditure with forecasts made in the last three years shows that apart from the pre-credit crises 2009 forecast, actual expenditure has been reasonably in line with forecasts. Actual construction expenditure in 2012 was R7,3 billion below the 2011 forecast.
Eskom, Transnet and SANRAL, as well as ACSA, did the bulk of the public corporation capital spending, in the construction industry with the run up to the 2010 FIFA World Cup.