Confidence in the building industry has remained constant over the past few quarters, marginally increasing in the fourth quarter of 2012. This gives a somewhat hopeful perspective for the industry.

However, sentiment is still predominantly negative as the majority of SME contractors have yet to benefit from increased government spending on infrastructure development with over one trillion rand planned investment in infrastructure projects over the next eight years. But there is no certainty of the financial benefits of these initiatives because the perception is that government payments for work rendered remains slow.

This places additional pressure on contractors’ cash flow, resulting in a higher risk of payment defaults as well as restricting smaller contractors from applying for any further government tenders.

The largest contributors to government’s capital infrastructure expenditure over the recent past have been Eskom and Transnet. Transnet’s multi-product pipeline from Durban to Heidelberg has boosted construction work over the past few years. Eskom has spent extensive amounts on the Medupi, Ingula and Kusile power stations. The completion of these two major projects means that the market will be flooded with construction workers looking for work in 2013.

The increased supply of construction workers and a lack of demand for construction projects has resulted in increasing competition between firms, and  margins are being squeezed to almost zero. As a result, only larger firms can afford  operating at lower margins for longer periods.  Another factor is increased input costs.

The industry is more focused on contract labour rather than formal employment. This has resulted in a lack of sustainable job security, translating into a decline in consumer confidence in the industry. 

Coface expects costs in the construction sector to continue increasing at an average rate of 7% for 2013 with an estimated final growth for 2012 of 1,7%. Sales of building materials has decreased 10,16% Y-o-Y to its lowest point since 2004.

A possible cushion to the over-supply of labour and lack of job creation opportunities could be for government to revise the method of implementing budget hand-outs at municipal level. Recent figures indicate that only 72,5% of the total capital budget was spent in 2012 resulting in R12,8-billion being unutilised.

The Department of Public Works has urged the construction industry to deal with fraud and corruption due to its negative impact on the industry. The pronouncement has been made in light of the launch of the National Contractor Development Programme (NCDP). The NCDP is a programme involving a partnership between the Construction Industry Development Board (CIDB) and the National and Provincial Departments of Public Works. 

The Department of Public Works has committed to availing resources in order to help develop previously disadvantaged contractors and to align individual contractor development programmes or initiatives with the principles set out in the NCDP framework.

The NCDP is seen as a good response to concerns that were raised by policy makers, contractors and development agencies. It provides leadership on the implementation of contractor development programmes, coordinates implementation and provides a reporting framework for monitoring and evaluation of contractor development programmes. It also provides access to mentorship, financial support, information and access to any other support that would be relevant for contractor development.

The department has challenged contractors to be better organised and to take advantage of the opportunities provided by the government. Government is showing commitment in developing contractors and to provide them with opportunities to grow their businesses.

The delay in rolling out these plans could however be attributed to the nature of administrating and implementing them. This includes the national distribution to municipalities, the municipal tender processes, tiered production payment schemes and subcontractor reimbursements.

Meanwhile, there is a specified amount of money awarded to municipalities each year according to the infrastructure roll-out programme. If a municipality fails to spend their budget in the allocated period, the funds are returned to the National Treasury and, as the next period’s budget allocation is dependent on the previous spend, that municipality’s budget will be reduced for the next period.

It has been noted that slowed performance during the second half of 2012 was influenced by intense competition for contracts and low margins, especially in the roads sector. Shortages of bitumen, a key ingredient in the production of asphalt, have compounded the situation. Insufficient time and funds were allocated by Government for the maintenance of existing infrastructures in the past. As a result, the cost of replacing these structures far outweighs the accumulated maintenance costs. 

By George Marais, industry analyst, Coface, the international credit insurer.

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About Coface

The Coface Group, a worldwide leader in credit insurance, offers companies around the globe solutions to protect them against the risk of financial default of their clients, both on the domestic market and for export. In 2012, the Group posted a consolidated turnover of €1.6 billion. 4,400 staff in 66 countries provide a local service worldwide. Each quarter, Coface publishes its assessments of country risk for 158 countries, based on its unique knowledge of companies’ payment behaviour and on the expertise of its 350 underwriters located close to clients and their debtors. In France, Coface manages export public guarantees on behalf of the French state.

Coface is a subsidiary of Natixis. corporate, investment management and specialized financial services arm of Groupe BPCE.. In South Africa, Coface provides credit protection to clients. Coface South Africa is rated AA+ by Global Ratings.