PM firms leave SA as the government fails to spend on infrastructure

South Africa could be on the verge of losing much of its engineering and construction capacity due to weak local industry conditions, and the government’s slowness in rolling out its promised R846-billion infrastructure spend programme.

This situation is literally causing local engineering and construction firms to “pack for Perth”, while others are venturing further into Africa and elsewhere. At least three of the big five South African construction and engineering firms have sought to improve their fortunes in Australia and elsewhere.

With these firms being tied up in various large projects outside the country, this has raised concerns in some quarters – that should the public infrastructure programme eventually get going, the shortage of engineers and other skills already constraining the sector could cause further delays.

Graham Pirie, chief executive officer of Consulting Engineers South Africa (Cesa), says that with 60% of the consulting engineering sector’s work coming from the public sector, the sector is very concerned over the slow pace of government delivery. This, he says, is mainly caused by a lack of capacity, particularly the lack of experienced technical leadership at local government level.

“However, we know from our interactions with government in Nedlac [National Economic Development and Labour Council] and elsewhere that the government is acutely aware of this, and we are very encouraged by the new Presidential Infrastructure Co-ordinating Commission that has been established to address this,” adds Pirie.

But speaking for the consulting engineering sector, he believes that despite the skills shortages, local firms will be able to deliver once the government infrastructure programme comes on line.

Pirie notes that because of economic conditions elsewhere, many engineers are returning home to South Africa.

South African engineering and construction firms enjoyed a temporary boom during the build-up to the 2010 Fifa Soccer World Cup, with government orders for airports projects, new stadiums, freeway upgrades, bus rapid transit systems and more. This was negatively counterbalanced, however, as construction projects in the private sector started taking a dip in 2009 and 2010, with dwindling demand for new residential and commercial property build.

It is almost only the mining sector in South Africa that has been offering some respite, with a number of firms focusing on new projects in this sector.

At least three large construction firms – Aveng, Wilson Bayly Holmes Ovcon (WBHO) and Basil Read – have spread their wings mainly to Australia, but also into Africa and Asia. Others, such as Group Five, are increasingly taking on projects in Africa, the Middle East and Eastern Europe.

Group Five’s over-border portion of its R8.8-billion construction order book now stands at 30%.

Aveng reported a 37% fall in headline earnings to R1.2bn for the year to 30 June, which CEO Roger Jardine blames on the “significant” slowing of the local construction and infrastructure environment, particularly in the public sector. He warned that the infrastructure market in South Africa would most likely remain under pressure for the next two years.

The growth in the firm’s two-year order book comes mostly from its Australasian operations. By November, it reported that about 85% of its order book came from the private sector, and 73% from projects outside South Africa.

Construction firm WBHO believes industry conditions will remain negative for some time to come. The group generated most of its revenue, namely 52%, for the year ending on 30 June outside South Africa, specifically in Australia and the rest of Africa.

It is very optimistic about business opportunities in Australia, saying that 35% to 40% of its annual revenue is already being generated in that country.

WBHO shared a generally pessimistic view in the industry: apart from the known large projects such as that of Eskom and some roads projects already started, public sector projects are unlikely to be launched any time soon; and even if they were, red tape, indecision and lack of capacity generally cause delays of up to three years before actual construction work can begin.

Basil Read announced in September that it had acquired a majority 52% interest in Australian civil engineering company, Central Systems, as it was continuing to expand into markets outside South Africa due to the flat local commercial and public infrastructure conditions.

But it added that the first half of 2011/2012 was marked by difficult trading conditions as well as the economic pressure experienced worldwide.

Like other companies in the construction and construction supply industries, Accentuate – a flooring and chemicals manufacturer and distributor listed on the Johannesburg Stock Exchange – reported negative results as it moved into the red, blaming it on the difficult trading conditions in the sector.

Since early 2010, President Jacob Zuma and others in his government have been stressing the need to stimulate economic growth and job creation through a massive public infrastructure programme. The government’s National Planning Commission, headed by Minister in the Presidency Trevor Manuel, has identified underinvestment in public infrastructure spend as a key negative contributing to slow economic growth.

In his recent Medium-Term Budget Statement, Minister of Finance Pravin Gordhan said public sector infrastructure spend stood at about R233bn, or 7.8% of South Africa’s gross domestic product, with state infrastructure plans for the next three years rising to R802bn. But the exact figure for the government’s envisaged infrastructure spend seems elusive, with figures mentioned having ranged from R800bn to R846bn, to over a trillion rand.

When the government gathered recently for its annual mid-year lekgotla, it acknowledged the underperformance of public infrastructure expenditure against its own initial targets. This resulted in the establishment of the Presidential Infrastructure Co-ordinating Commission (PICC), headed by President Zuma himself. Its sole aim is to iron out problems and speed up infrastructure spending.

It held its first meeting in September, which focused on the need for accelerated investment, better co-ordinated and integrated planning and implementation, and the need to improve the prioritisation processes and the allocation of funds.

Pirie says the creation of the PICC is “very good news”, as it will “drive the large infrastructure projects right from the top”.

While he agrees that many firms are looking for work outside South Africa, he emphasises that they are not relocating. He says Africa (beyond South Africa) is being viewed as “the next big thing” in the industry. “Although Africa comes at a higher risk, it also comes with huge opportunity,” adds Pirie.

He suggests that a solution to current problems would be for the industry – which has spare capacity – to partner with the government around new mechanisms and procurement models to recreate lost technical capacity.

Several major road and rail projects, the Eskom expansion programme, and various private sector mining projects are in the pipeline. Hopefully these will come on stream soon to prevent a more permanent exodus of South African construction and engineering firms. ☑

Stef Terblanche

Terblanche has more than two decades of experience as a journalist, much thereof as a freelance writer after having worked for various major South African publications. His areas of specialisation include South African and African politics, government, business, trade and development, as well as travel and the arts. Terblanche has published his own sociopolitical newsletter since 1986 and writes a regular column, “Out of Africa”, as well as poetry and short stories; he is also an award-winning artist.