Construction projects ‘pie in the sky’

This article first appeared in Moneyweb

Government’s R595 billion second tranche of infrastructure projects have been described as ‘pie in the sky’ with much of the required investment not available.

Aspirations versus reality: with a 20% contraction in 2020 and growth of just 6.2% expected this year, the slow recovery of the civil engineering and construction sector is causing growing frustration. Frustration is growing over the slow recovery of South Africa’s civil engineering and construction sector and its knock-on effects in the wider economy

The government’s massive infrastructure expenditure is – in some quarters – also not expected to ease the industry’s plight.

This is despite the government in October unveiling the second tranche of the Sustainable Infrastructure Development Symposium South Africa (Sidssa) project pipeline comprising 55 new catalytic infrastructure projects valued at about R595 billion, which is anticipated to create an estimated 538 500 employment opportunities.

Industry Insight CEO Elsie Snyman says financing is unfortunately a problem for these projects, with 75% of the required investment not available “rendering the potential pipeline of projects, just another pie in the sky that sounds good on paper only”.

FUNDING GAP RUNS TO HUNDREDS OF BILLIONS

This is a reference to Minister of Public Works and Infrastructure Patricia de Lille’s admission when the second tranche of Sidssa projects were announced that there is a funding gap of about R441 billion for the 55 new projects being presented to the market.

South African Institution of Civil Engineering (Saice) president Vishal Krishandutt is concerned about the slow rollout of projects but believes “2022 holds potential for improved sector growth”.

“When we look back on the economic recovery plans which were announced in 2020, we remember that much of these plans centre on infrastructure development for job creation,” he says.

“However, as 2021 draws to a close, frustrations grow over the slow recovery of the sector – and the knock-on effects to the wider economy. The sector saw a 20.3% contraction in 2020 and is expected to have grown just 6.2% in real terms this year,” he adds.

Krishandutt says 2021 has been a watershed year for most South Africans, with many finding themselves in a situation they never thought they would be in a few years ago.

He says the rate of retrenchments and resignations was significantly higher, and many companies either closed their doors or opted for government bailouts in order to survive. “The few infrastructure projects that went into construction during this time did not have a significant impact on the sector and the number of tenders advertised by government were very few,” says Krishandutt.

However, he believes there is reason to be hopeful.

Krishandutt refers to the 50 strategic integrated projects (SIPs) and 12 special projects involving an investment of R340 billion that were unveiled by the government in July 2020 as the first tranche of the Sidssa project pipeline.

These projects were supposedly “shovel ready” and were anticipated to commence within three months as part of President Cyril Ramaphosa’s infrastructure investment drive to stimulate the economy.

PROJECTS ‘WOULD NOT DRAW MONEY FROM THE FISCUS’

Head of Infrastructure and Investment in the Presidency Dr Kgosientsho Ramokgopa said at the time that funding from the debt capital market accounted for R340 billion of the total investment in these projects and they would not draw any money from the fiscus.

Krishandutt says that while the pace of progress has been slow, “it is there”.

Other construction industry bodies, including the SA Forum of Civil Engineering Contractors (Safcec) and Master Builders South Africa (MBSA), have also lamented the slow rollout and implementation of infrastructure projects.

SOME PROGRESS

Krishandutt says about 33% of these projects are in construction and some have already been completed while another 20% are at various stages of preparation and feasibility. He says the advertising of more tenders in the third quarter of 2021 is “further positive news”.

“While the net effect of those tenders will only be felt in six to 12 months’ time, firms should start preparing themselves for work and be ready to show that they have adequate skills and prior experience to win contracts,” he noted.

“The past two years have been tough, to say the least. However, I believe we have shown resilience. With a renewed focus on training and investment, 2022 holds potential for improved sector growth,” adds Krishandutt.

However, Snyman is less optimistic, stating that government targets related to the National Development Plan (NDP) are “still dismally missed, gross fixed capital formation (investment) to GDP is at 14% against a target of 30%”.

Snyman adds that according to Sidssa, 54% of the potential projects are either in pre-feasibility or feasibility stage, with less than 10% under construction.

DELAYS KNOCK CONFIDENCE

Delays in awarding infrastructure projects are believed to be responsible for confidence in South Africa’s civil construction industry dropping in the fourth quarter of this year, with confidence levels deteriorating despite most of the underlying indicators, such as activity and profitability, improving in the quarter.

The FNB/Bureau for Economic Research (BER) civil confidence index, released earlier this month, dropped by two index points on a 100-point scale to 15 in the fourth quarter.

The current level of the index, which has been hovering around the 20-point mark since the middle of 2017, means 85% of civil construction respondents to the survey are dissatisfied with prevailing business conditions.