Construction World September 2018

MARKETPLACE

DEMISE OF LARGE CONTRACTORS as construction industry struggles

The years since 2011 have seen the demise of South Africa’s large construction firms, with the country’s listed contractors losing almost 70% of their value over the past decade.

S peaking at AfriSam’s recent breakfast briefing on the State of the South African Construction Industry in Johannesburg, Industry Insight senior economist David Metelerkamp says that small firms have taken over a substantial portion of market share from larger players. “From a 60% contribution to the market in 2012, the large companies now account for only just over 40% of market share,” said Metelerkamp. “From under 16%, the smaller firms now also make up about 40%.” He noted that several large contractors are now in business rescue, if not insolvent, and the market share of medium-sized companies has been more or less flat over this period. Various factors are behind this situation, not least of all the fact that the civils sector has been “in the doldrums” for some time, with poor annual growth levels until 2016, followed by five consecutive quarters of negative growth. The situation was aggravated by a break- down in trust between large firms and gov- ernment, after numerous cases of collusion were uncovered in infrastructure projects leading up to the 2010 World Cup. “Transformation has played quite a big

role,” he said. “Government was not happy with the rate of transformation in the sector, so broke up their bigger infrastructure projects into smaller pieces to award them to small contractors, which explains why smaller players started taking a bigger share of the overall pie.” The large companies also had over- capacity, he argued; they were geared for a level of growth that was simply not being achieved and have been slow to restructure and to implement the necessary efficiencies. The government’s financial position also played a role, as it had to consolidate the national budget in the face of rating agency downgrades and rising government debt. “In my opinion, there may also just be too many listed construction companies in South Africa,” Metelerkamp said, pointing out that nine such firms were listed on the JSE. “If you look at other emerging markets, and even advanced economies, there are only three listed contractors in China, two in Brazil, five in Turkey, and four in Australia.” Those large South African firms still doing well were finding most of their work outside of the country. The civils sector is certainly bearing the brunt of the construction downturn, with the worst

levels of confidence since the early 1990s. “Over the last 18 months, there has been a significant decline in the value of tenders awarded in total,” he said, pointing to a 26% decrease in the value of projects over the past year. Generally, order books across the civils sector remain flat and dipping, possibly due to the planned clean-up of the state-owned enterprises by President Cyril Ramaphosa’s new administration. “This is positive in the medium to long run for the civils sector,” he said, “but con- ditions will remain tough this year, which will possibly be the worst year for the civils sector; we are expecting some improvement next year and the following year.” On the positive side, Metelerkamp high- lighted that there has been more interest from private investors in renewable energy, so the civils sector will have to rely more on the private sector than it has traditionally. There might also be good news related to the next national election being on the horizon, as the run-up to elections often see a raft of tenders going out. “The building sector, being driven by private investment, is looking slightly better,” he said. In the residential segment, flats and townhouses will drive future growth, while the non-residential segment is seeing more positive tendering values. Addressing industry stakeholders at the AfriSam briefing – which included construc- tion firms, retailers, trade unions, manage- ment, material suppliers like AfriSam and industry associations – AfriSam’s chief executive officer Rob Wessels reiterated the positive role that construction played in creating employment. While construction contributes just 3% of gross domestic prod- uct, it employs roughly 9% of South Africa’s labour force, about 1,4 million of South Africa’s total of about 16,3 million employed.

Richard Tomes, Sales & Marketing Executive, AfriSam, (LEFT) and Rob Wessels, CEO, AfriSam.

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CONSTRUCTION WORLD SEPTEMBER 2018