South Africa: On the path to new policies

South Africa’s construction industry is beginning to revive activity, with demand in most segments still muted following a post-World Cup 2010 slowdown in project spending, but edging up slowly – although a proposal by a senior government minister for the establishment of a state-owned contractor may dampen private sector confidence.

After several quarters of underwhelming performance, there have been signs that the construction sector is easing slowly out of the doldrums, although the outlook is far from positive. In mid-April, the First National Bank (FNB) and the Bureau for Economic Research (BER) released the findings of their latest survey of the construction industry. In its civil construction confidence index, FNB/BER found industry sentiment had risen to 34 points for the first quarter of the year, well up on the 26 points for the preceding quarter, and the 21 posted for the third quarter of 2011. However, with a score of 100 indicating a positive outlook, the latest figure still indicates an extremely cautious forecast.

Cees Bruggemans, FNB’s chief economist, said the present level of the confidence index showed that some two-thirds of respondents remain dissatisfied with prevailing business conditions. “Activity is up, but the slow rate at which new work seems to be appearing could hamper the pace of the recovery in this sector,” he said.

As a result of the muted activity, there was a 6.7% decline in employment levels in the construction industry for the quarter.

Much of the new activity in the pipeline is part of big-ticket state infrastructure projects, though at least some of these are already behind schedule. These delays, along with a general slowdown of the economy, have prompted concerns over timely project delivery in the public sector, which has often been an issue in previous fiscal years.

In spite of that, however, government projects have been key in helping stem further complications in the construction sector, by providing a steady flow of capital for a variety of new infrastructure and building projects. For example, while there has been a downturn in construction of private housing, this has been offset to some degree by state spending on public housing units.

The extent to which that trend might continue is currently a subject of discussion, however. Speaking in parliament on his ministry’s annual budget, the minister of human settlements, Tokyo Sexwale, said the cost of repairing poorly built public housing units was a constant drain on state finances, adding that corruption and low quality of workmanship was rife among private contractors.

One answer to these problems was taking state housing development out of private hands, the minister said. “Is it perhaps not time to establish a state-owned construction company? We at Human Settlements are exploring this idea together with Public Works. Let us debate it,” he said.

The proposal has generated plenty of heated debate, with some support for the plan coming from the union movement and community groups. On May 1 the National Education, Health and Allied Workers’ Union (NEHAWU) issued a statement backing the minister’s proposal, saying that failings of private sector builders involved in the public housing development process meant the time was ripe for a state-funded company to be created. “We will always welcome and support any initiative that will result in construction cost reduction and also assist in job creation,” the union said.

Construction firms, however, have raised concerns that the state would struggle to establish a construction company that would attract employees with the adequate skill and experience to meet even minimum standards. They have also complained that the state is undermining the private sector.

According to Tumi Dlamini, the executive director of Master Builders South Africa, a national organisation representing the industry, setting up a state-backed construction firm would have a negative impact on the private building trade, which she said has a proven track record and expertise.

“We are very concerned that the thought of a new company comes at a time when the government faces one of its major challenges regarding capacity and expertise within its departments, resulting in its inability to deliver essential services for the people of this country,” Dlamini said on May 14 in an interview with local newspaper The Post. “This casts major doubt on the ability of a government to form, run and manage its own construction firm that could rival or even equal the current expertise found within our sector.”

Another to speak against the proposal was Afrifocus Securities analyst Hugan Chetty, who felt redirecting spending away from private sector firms would weaken the industry. “This would hurt the industry, especially for low-cost housing players,” Chetty told local media in May. “This would not be the right thing for the industry. It’s going to cause unrest with the other construction companies who are fighting to stay alive.”

So far, the proposal for a state-owned contractor has remained just that: a proposal. No concrete steps have yet been taken to actually introduce legislation. However, while the debate over who would be best placed to implement the government’s big-ticket items continues, there is no doubt that the construction sector will need as much support as it can get if it is to continue its slow climb out of the recession.

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