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Johannesburg - The South African construction industry was particularly hard hit when the infrastructure development highs leading up to the 2010 FIFA World Cup were followed by a global recession, auditing firm PricewaterhouseCoopers (PwC) told Fin24 in an interview.
“The discrepancy between the performance of the construction index and the JSE all-share index is stark,” PwC said on Tuesday in the inaugural edition of its SA Construction publication.
“Not only has the industry been punished for its lacklustre financial performance in the down cycle, but also because of public perception following the Competition Commission findings.”
The contraction in the global construction industry and in particular in South Africa post 2010 has increased competition and eroded margins to the longer-term average of between 2% and 3%.
The market volatility experienced by developing economies and commodity-based economies has resulted in delays in foreign-backed, state-owned and large-scale mining projects.
A major disappointment for construction companies has been the failure of the government’s infrastructure spends - a critical driver for recovery - to materialise.
The anticipation of significant capital expenditure by governments meant that construction companies retained capacity, but at a significant cost.
Bottomed out
“[But] it appears that the economic cycle has bottomed out,” said PwC Partner Andries Rossouw, “with a number of encouraging signs from the financial performance of individual companies, order book growth and public infrastructure commitments”.
Capital expenditure by public-sector institutions has increased by 11.7% since 2011, with total expenditure in 2012 amounting to R202bn.
A number of infrastructure projects have been rolled out across the African continent. The Industrial Development Corporation invested a total of R6.2bn in 41 projects across 16 African countries in 2012, the majority of these being in mining, industrial infrastructure and tourism.
Within South Africa, the government is on track to spend in excess of R4 trillion on infrastructure in the near future, focusing on rail, roads, water, energy, communication and sanitation
For now, however, the secured order book only covers 1.2 times current-year revenue.
Aveng’s order book decreased by 20% mainly as a result of a reduction in the mining order book as well as the softening infrastructure market.
Basil Read and Protech showed marginal decreases, while the remaining companies experienced growth in excess of 10%, most notably Esorfranki, which saw year-on-year growth of 41%.
Healthy increases
The Group Five and Calgro order books also experienced healthy increases of 26% and 25% respectively.
The common key risks identified by the top-10 South African construction companies include risks to
transformation, health, safety and environmental sustainability, followed by growth and expansion, and compliance with laws and regulations.
Transforming the construction industry and with it the country is seen by the industry as a business imperative.
The limited pool of experienced engineers suitable for management positions and the steep learning curve and time frame required to equip graduates with management capabilities, remain a significant barrier to transformation.
The construction industry, the government and trade unions are placing increasing focus on occupational safety.
There is also an increase in awareness for the need for greater discussion of safety matters in companies’ annual integrated reports, increasing rigorous safety inspections by the Department of Labour and safety stoppages.
Anti-competitive conduct
The risk of reputational damage resulting from non-compliance relating to anti-competitive conduct was highlighted during 2013.
In June 2013 the Competition Commission fined the major construction firms a collective R1.46bn for anti-competitive behaviour, and inclusive tendering relating to projects concluded between 2006 and 2011.
“Given the myriad of local legislation and regulations relating to corporate governance, labour, taxes, health and safety, and the environment, there is the added risk of non-compliance,” said Diederik Fouc, PwC consumer and industrial products and services industry leader.
The construction industry is listed as one of the seven areas on which the South African Revenue Service would like to focus in the next four years, given that “research has shown compliance within the sector to be low”.
“The new landscape requires improved governance, adequate risk management practices, improved transparency and disclosure in respect of taxes,” said Fouch.
“It is imperative that construction companies focus on risk and the risk landscape within which they operate.”
Significant value to South Africa
Meanwhile the construction sector continues to add significant value to South Africa and its people.
In 2013 the value received by employees, including employee tax, represented 82% of the value created.
“This is a significant contribution to the labour market,” said PwC. “According to Stats SA, more than 420 000 people are employed directly by the construction industry.”
The state received 5% (2012: 5%) of value created in the form of direct taxes, and significantly more if one takes into account employee income tax and indirect taxes like VAT.
The percentage of value created that is collected by providers of debt capital has remained consistent with the prior year at 3% - reflecting the fairly conservative levels of gearing in the South African construction industry.
The 1% (2012: 2%) received by the providers of equity capital decreased from the prior year, and reflects the volatility of returns to shareholders.
“Of the value created, there were no funds left to fund future growth,” said Rossouw.
“In the prior year, retained funds had to be utilised to fund reinvestment. Using borrowings or retained cash resources to fund operations and capital projects during a downturn is common for any cyclical business. [But] it goes without saying that this cannot continue in perpetuity.”
- Fin24
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“The discrepancy between the performance of the construction index and the JSE all-share index is stark,” PwC said on Tuesday in the inaugural edition of its SA Construction publication.
“Not only has the industry been punished for its lacklustre financial performance in the down cycle, but also because of public perception following the Competition Commission findings.”
The contraction in the global construction industry and in particular in South Africa post 2010 has increased competition and eroded margins to the longer-term average of between 2% and 3%.
The market volatility experienced by developing economies and commodity-based economies has resulted in delays in foreign-backed, state-owned and large-scale mining projects.
A major disappointment for construction companies has been the failure of the government’s infrastructure spends - a critical driver for recovery - to materialise.
The anticipation of significant capital expenditure by governments meant that construction companies retained capacity, but at a significant cost.
Bottomed out
“[But] it appears that the economic cycle has bottomed out,” said PwC Partner Andries Rossouw, “with a number of encouraging signs from the financial performance of individual companies, order book growth and public infrastructure commitments”.
Capital expenditure by public-sector institutions has increased by 11.7% since 2011, with total expenditure in 2012 amounting to R202bn.
A number of infrastructure projects have been rolled out across the African continent. The Industrial Development Corporation invested a total of R6.2bn in 41 projects across 16 African countries in 2012, the majority of these being in mining, industrial infrastructure and tourism.
Within South Africa, the government is on track to spend in excess of R4 trillion on infrastructure in the near future, focusing on rail, roads, water, energy, communication and sanitation
For now, however, the secured order book only covers 1.2 times current-year revenue.
Aveng’s order book decreased by 20% mainly as a result of a reduction in the mining order book as well as the softening infrastructure market.
Basil Read and Protech showed marginal decreases, while the remaining companies experienced growth in excess of 10%, most notably Esorfranki, which saw year-on-year growth of 41%.
Healthy increases
The Group Five and Calgro order books also experienced healthy increases of 26% and 25% respectively.
The common key risks identified by the top-10 South African construction companies include risks to
transformation, health, safety and environmental sustainability, followed by growth and expansion, and compliance with laws and regulations.
Transforming the construction industry and with it the country is seen by the industry as a business imperative.
The limited pool of experienced engineers suitable for management positions and the steep learning curve and time frame required to equip graduates with management capabilities, remain a significant barrier to transformation.
The construction industry, the government and trade unions are placing increasing focus on occupational safety.
There is also an increase in awareness for the need for greater discussion of safety matters in companies’ annual integrated reports, increasing rigorous safety inspections by the Department of Labour and safety stoppages.
Anti-competitive conduct
The risk of reputational damage resulting from non-compliance relating to anti-competitive conduct was highlighted during 2013.
In June 2013 the Competition Commission fined the major construction firms a collective R1.46bn for anti-competitive behaviour, and inclusive tendering relating to projects concluded between 2006 and 2011.
“Given the myriad of local legislation and regulations relating to corporate governance, labour, taxes, health and safety, and the environment, there is the added risk of non-compliance,” said Diederik Fouc, PwC consumer and industrial products and services industry leader.
The construction industry is listed as one of the seven areas on which the South African Revenue Service would like to focus in the next four years, given that “research has shown compliance within the sector to be low”.
“The new landscape requires improved governance, adequate risk management practices, improved transparency and disclosure in respect of taxes,” said Fouch.
“It is imperative that construction companies focus on risk and the risk landscape within which they operate.”
Significant value to South Africa
Meanwhile the construction sector continues to add significant value to South Africa and its people.
In 2013 the value received by employees, including employee tax, represented 82% of the value created.
“This is a significant contribution to the labour market,” said PwC. “According to Stats SA, more than 420 000 people are employed directly by the construction industry.”
The state received 5% (2012: 5%) of value created in the form of direct taxes, and significantly more if one takes into account employee income tax and indirect taxes like VAT.
The percentage of value created that is collected by providers of debt capital has remained consistent with the prior year at 3% - reflecting the fairly conservative levels of gearing in the South African construction industry.
The 1% (2012: 2%) received by the providers of equity capital decreased from the prior year, and reflects the volatility of returns to shareholders.
“Of the value created, there were no funds left to fund future growth,” said Rossouw.
“In the prior year, retained funds had to be utilised to fund reinvestment. Using borrowings or retained cash resources to fund operations and capital projects during a downturn is common for any cyclical business. [But] it goes without saying that this cannot continue in perpetuity.”
- Fin24
Add your voice to our Property Issue:
* Write a guest post
* Share a personal story
* Ask the experts
