Toil and trouble beset construction and engineering sectors
The spotlight on the construction services sector seems to have diminished after years of increased activity and its enhanced contribution to GDP after the 2010 Fifa World Cup.
Empirical evidence from Statistics SA shows that the positive effects of derived activities from SA hosting the World Cup invariably increased the construction sector’s rand value-add to the domestic economy to 2014, before peaking in 2016. However, since 2016 the rand value and contribution of the industry to local economic activity have diminished considerably.
With pessimism about the global economy growing throughout 2019, driven by disappointing data, a trade war and a political crisis in Britain, there is reason to be concerned about dwindling local construction activities. The construction sector’s poor performance is worrisome, given the extended negative effect on the manufacturing sector, including its heterogeneous metals and engineering cluster of industries.
A critical review of recent, real seasonally adjusted and annualised Stats SA data shows that from 2010 to 2014 the rand value of the construction industry increased by almost R11bn. However, the robust performance was not replicated from 2014 to 2018, when the rand value increased by only R1.2bn.
On a year-on-year basis, the sector’s contribution to GDP decelerated from a peak of 4.6% in 2013 to 3.5% and 1.2% in 2014 and in 2016 respectively, before trending in the negative territory (-1.2%) in 2018.
Construction is an important industrial sector that also provides ample opportunities for technical and vocational capacity development. It is one of the key industries to which the strategic metals and engineering cluster of industries sells its intermediate products, thereby reflecting the structure of domestic demand pattern for the applicable subcomponents of the cluster.
The Steel and Engineering Industries Federation of Southern Africa’s (Seifsa’s) state of the metals and engineering sector report for 2019/20 shows that construction (23.5%), the automotive industry (12.1%) and mining (6.1%) are the top industries to which the metals and engineering cluster sells its output. The cluster also buys a significant portion of its inputs from the construction sector, highlighting the high level of existing interdependence.
Domestic demand patterns from key local industries, combined with the demand for the final manufactured products, determine the prospects for the metals and engineering cluster of industries. Given the importance of the construction sector to the broader metals and electrical subcomponents, the latter’s current poor performance is a deep concern.
The subdued performance is compounded by developments that seem to paint a bleak picture for construction activities in the country.
The concern is that of SA’s leading construction and engineering companies being financially distressed and filing for business
Group Five is reported to be facing challenges in servicing its debts or growing its clientele and may eventually retrench a significant portion of its workforce. Sadly, it joins a long list of financially stressed construction engineering companies under business rescue, like Basil Read and Esor. However, business rescue is better than liquidation and ample support will help the big and small construction companies alike navigate existing challenges.
Additional developments away from boardrooms and on construction locations have also been disheartening. Unlike manufacturing, which usually involves large-scale production of intermediate or final products, often without a chosen buyer, construction typically takes place on a construction site and for a known client. This has made it easier for local contractors to be targeted by individuals with nonaltruistic motives under the banner of mushrooming multifaceted business forums.
The origins of the unpopular business forums, which now seem to have a national footprint and sphere of influence spanning provincial boundaries, are well documented. Their members thrive on using perceived unconventional means to gain traction and attention.
Termed the “construction industry mafia” by the press, the various business forums have assumed different names (ranging from the moderate Federation for Radical Economic Transformation to the more rigorous Amadelangokubona, but have the same modus operandi.
They challenge the status quo by targeting construction locations to demand commission or the involvement of their members in projects. The operational scope and intensity of the various business forums does not seem to be abating. The situation therefore calls for a different approach in dealing with their demands in resolving the quandary, perhaps via a combination of law enforcement and dialogue.
Seifsa CEO Kaizer Nyatsumba recently used several platforms to highlight the predicament faced by local construction and engineering firms.
In a letter to the police minister (in which he copied the president and all economic cluster ministers), Nyatsumba diligently explained how companies have been approached by gangs of people who have violently interrupted work, destroyed expensive capital equipment and demanded to be given 30% of the value of public tender contracts. He made a clarion call on the police minister to deal urgently with the situation because, if left unattended, it may pose significant risk to business investment in the country.
A similar call was made by the CEO of the SA Forum of Civil Engineering Contractors, Webster Mfebe, who called on the government and law-enforcement officers to act urgently and stop what he termed criminal gangs from obstructing construction projects.
While it is vital for the law to take its course, it is also important to pursue a win-win solution in resolving the crises, rather than a zero-sum game. Accordingly, all the leaders of the various business forums should constructively engage with captains of industry in seeking a way of resolving the impasse.
The current modus operandi of mainly using force and threatening contractors with deadly weapons could result in calamity and sink the construction industry, with extended ramifications for the broader economy, including job losses and constriction of the tax base. Given that the violence in the construction sector can be extrapolated to the primary sector and industrial production, business and investor confidence would also take a knock.
It is therefore imperative that captains of industry and government representatives — including the police — and members of the business forums meet to map a way forward through peaceful, constructive but robust dialogue, aimed at salvaging the ailing construction sector. Meanwhile, businesses are also encouraged to expose incidents of violence and report cases of intimidation on construction sites to law enforcement officers, to mitigate negative consequences on jobs.
Together with the manufacturing sector, the construction sector has indirect job-creation multiplier potential and is key in redressing the high unemployment rate in the country. The sector provides employment for about 618,000 people, but the numbers have slowly dwindled. In December 2018, the sector lost 18,000 jobs, with full-time employees bearing the brunt of the jobs bloodbath. Although this was mainly due to a decrease in the building of complete constructions, or parts thereof, civil engineering, building installation and building completion, the effect of these business forums cannot be discounted.
The suggestion is for policymakers to establish a high-level, multidisciplinary and interprovincial task team of law-enforcement officers, to investigate alleged criminal activities and deal effectively with the issues at hand.
Contemporaneously, a platform for a national dialogue involving all relevant parties should be created to avoid a zero-sum game, provide certainty and arrest the construction industry’s consistent decline.
- This article was written by Dr Ade is Seifsa chief economist and it was first published in the Business Day