No turnaround in civil engineering sector expected anytime soon – economist

No turnaround in civil engineering sector expected anytime soon – economist

6th March 2019

By: Shirley le Guern
Creamer Media Correspondent

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The civil engineering sector is in recession with no big turnaround expected anytime soon, economist David Metelerkamp told attendees at the Consulting Engineers South Africa (Cesa) Infrastructure Indaba, in Durban, on Wednesday.

He noted that the broader South African economy had been negatively impacted on both by internal dynamics and negative trends within the global economy, including the slowdown of the Chinese and European economies, trade issues stemming from conflicts between the US and China and Brexit

However, since 2016, South Africa had underperformed emerging market peers, with its performance in the past two years having been particularly poor.

Metelerkamp said one of the more alarming issues was that gross domestic product growth had essentially been flat and had not kept pace with population growth. The past ten years, during which growth averaged 1.8%, was essentially a lost decade during which both foreign and local investment had stalled. The lack of investment meant that the country had been unable to build capacity for future growth.

Even against this negative broader context, the construction industry had underperformed in relation to the rest of the economy since 2013.

Although the proposed reform of State-owned enterprises (SOEs) was positive for the construction industry, Metelerkamp cautioned that this was unlikely to happen in the short term given political issues within an election year. He also warned that there could be short-term fall-out for companies supplying SOEs as commissions of inquiry unravel corruption and malfeasance and spending is curtailed.

“It’s an important opportunity but, holistically, it is going to be really difficult so I am not massively optimistic,” he added.

Negatives included continued uncertainty surrounding land tenure, which was driving investors away, and ongoing new revelations regarding the depth of State capture.

“Because of the fractured African National Congress, expecting big reforms will be unrealistic. Don’t hold your breath for a whole lot of change,” he warned.

His analysis of the 2019 Budget also highlighted potential risks for the economy in general and the construction sector, in particular.

He said the National Treasury had tried to spend as much as it could and was “walking a tightrope”.

Outlining the trends in infrastructure spending over the past three years, he cautioned that the projected increase for 2019/20 to R864.9-billion was marginal and equated to just 3.7% in nominal terms and 6.2% if underspending was taken into account.

Turning to government’s proposed infrastructure build programme and infrastructure fund, Metelerkamp welcomed government’s intention to partner with the private sector, development banks and development finance institutions and an increase in the number of “blended finance projects”, but noted that the budget did not provide sufficient details as to how this would be achieved.

Legislation still needed to be put in place to facilitate this process, which meant it would only begin to emerge within the next two to three years. “So, this is a step in the right direction, but there will be growing pains in the short run,” he said.

He noted that the demise of big contractors continued, a trend he expected would likely continue as the industry was still operating off a high base.

Pointing to the “massive destruction of the higher end of the construction industry”, he noted that business rescue of major companies such as Esor and Basil Read continued. Listed contractors had lost more than 70% of their value over the last ten years, he pointed out.

This had had a knock-on effect, with suppliers to the construction industry and even retailers in this sector feeling the effects.

He noted that Industry Insights’ company results monitoring service index had fallen by 18% in 2018. There had also been a marked decline in income for consulting engineers with an overall 21% decline in Cesa fee income in real terms. Further declines were possible.

Cesa estimated that there had been an overall 10% decline in employment in the second half of 2018 and Metelerkamp expects further job losses going forward.

However, he said it was important to understand the dynamics of these changes.

Overall, there had been a 15.3% decline in the nominal value of construction projects awarded in 2018 year-on-year and this came on the back of a 15.5% decline in 2017. There had also been a massive contraction in construction activity over a two-year period in real terms.

“The downturn was not surprising, but the pace at which everything fell apart was,” he said