Government’s credibility issues are affecting the civil construction sector

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A serious credibility problem with the government’s so-called “shovel ready” and bankable major infrastructure projects has been blamed for confidence in the civil construction industry remaining at near record low levels in the third quarter of this year.

The latest FNB/Bureau for Economic Research (BER) Civil Confidence Index released on Tuesday revealed that confidence rose to 11 on a 100-point scale in the third quarter from the record low of five index points in the previous quarter.

FNB/BER said downbeat prospects for work over the next few quarters also kept confidence low.

In the third quarter of 2020, a slightly higher percentage of respondents than the already elevated level in the previous quarter stated that the demand for new work, a proxy for company order books, was insufficient given normal business requirements while tendering competition intensified, FNB/BER said.

The fieldwork for the third quarter survey was conducted between August 12 and 31 this year.

All talk?

David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, was brutal in his assessment of the latest confidence levels in the sector.

“I think it’s a very good indicator that all the ‘shovel ready’ project talk is a load of nonsense.

“We have been tracking these projects and to the best of our knowledge not one of these projects has yet to be awarded,” he said.

“So it’s unsurprising that it [confidence] hasn’t recovered more.”

Metelerkamp said despite the improvement in the index in the third quarter, it was impossible for it to go lower “and it goes without saying that 11 is still really, really, really bad”.

But Metelerkamp said only Grade 9 contractors, the largest contractors, are surveyed for the FNB/BER civil confidence index and it is therefore not very indicative of the overall construction landscape.

State of government finances

Metelerkamp is also concerned about the state of government finances in the medium term and the impact this could have on the infrastructure expenditure programme despite the government’s reliance on private sector funding for these projects.

FNB property economist Siphamandla Mkhwanazi said it is disappointing that confidence remains this low in the third quarter with the Covid-19 lockdown restrictions on construction sector activity now lifted.

Mkhwanazi said although lockdown restrictions eased, such that construction firms could operate more normally, activity levels remained ultra-depressed with only a marginal improvement from the second quarter of this year.

He added that essentially all the confidence gains of the 12 months prior to the second quarter of this year “have been wiped out”.

Mechanism to boost economic growth

Mkhwanazi said there has been an increased focus on and talk about infrastructure development as a mechanism to boost economic growth post the pandemic.

“These results suggest that this has not yet translated into tangible opportunities for civil contractors,” he said.

“One can only hope that this will change and that work will pick up over the next few months or quarters because without it this sector will remain on the back foot.”

President Cyril Ramaphosa confirmed at the Sustainable Infrastructure Development Symposium (Sidssa) in June that the government has placed infrastructure at the centre of the stimulus South Africa’s economy needs to achieve a sustainable recovery.

This was followed by the government in July this year unveiling 50 Strategic Infrastructure Projects (SIP) and 12 special projects involving a total investment of R340 billion as the first tranche of a massive infrastructure expenditure programme to drive the post Covid-19 economic recovery effort.

These initial SIP projects are expected to create an estimated 275 700 jobs in six sectors.

Dr Kgosientso Ramokgopa, Head of the Investment and Infrastructure Office in the Presidency, said in July when the initial projects were unveiled that these “are projects that are shovel ready, so in the next three months we will be able to go into the ground … and ensure that we are able to stop the haemorrhaging of jobs in the economy”.

Economist Roelof Botha told Moneyweb earlier this month that the government’s infrastructure investment drive is arguably the most important tangible driver of recovery in construction.

Mkhwanazi added that the low confidence levels in the third quarter of this year were underpinned by continued pressure on activity.

Although activity levels improved compared to the second quarter of 2020, it is likely they are well below the level recorded in the third quarter of 2019.

According to Statistics South Africa, the real value of construction works declined by 30.9% year-on-year in the second quarter of 2020 after a more muted contraction of 1.9% year-on-year in the first quarter of 2020.

“While this quarter’s survey results suggest a further fall in activity in [the third quarter], it is unlikely that it is as dire as registered in [the second quarter]. That said, a mild decline such as registered in [the first quarter] is again way too optimistic,” Mkhwanazi said.

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