The civil engineering industry is not counting on government’s R3.2trn infrastructure development plan to boost it out of its current state of contraction.

Although the latest State of the Industry report by the South African Federation of Civil Engineering Contractors (Safcec) shows that there are some positive signs in the industry in the first quarter of 2012, lower employment and low tender prices are still signs of an industry “under stress.”

Safcec said it maintains the view that 2012 is likely to improve on 2011, but only in single digits.

“The opportunity presented by government’s infrastructure expenditure programme is limited, as infrastructure expenditure is projected to increase by single digits (below 5%) at most over the next few years,” the federation said in a statement.

According to Norman Milne, a member of Safcec’s management committee, there are two things to consider.

He told Moneyweb that the first is government’s capacity to deliver on the size of the programme as project management resources and skills to handle a programme of this magnitude are very limited.

The second is that a lot of the money envisioned for the programme will be spent on plants and equipment and not necessarily on civil works.

“For example, of the power stations being built by Eskom, Kusile and Medupi, only about 20% to 25% of that will involve civil works. With Transnet again a lot of the money goes into trains and rolling stock.”

President Jacob Zuma announced the R3.2trn infrastructure development plan in his state of the nation speech earlier in the year. The money will be spent of 17 broad projects spanning across various sector including rail, road, schools and hospitals.

Other factors impacting on the civil engineering industry according to the report is the uncertainty around the implementation of e-tolling and the underspending by municipal departments of their capital budgets, Safcec said.

The report indicates that of the R24bn conditional grants allocated to municipalities in 2011/12, R22bn has been transferred to municipalities, of which only R9.7bn had been spent by the end of the 3rd quarter 2011/12. The full R11.4bn municipal infrastructure grant – the largest conditional grant – was transferred to municipalities, but only R5.9bn was spent by the end of the third quarter.

“This particularly impacts on our smaller members,” Milne said. “They rely heavily on spending by municipalities. The problem is that they have the budget, but they’re not spending it.”

He said the municipalities also often pay the engineering firms late and that a lot of the smaller players cannot survive if they do not receive timely payments.

Sanyati

On Wednesday, news broke that the black empowered engineering firm Sanyati will be liquidated.

Milne told Moneyweb that if bigger players like Sanyati can go under, the pressure is severe on the smaller players.

Sanyati was, among other things, owed R60m by the Free State provincial government.

The State of the Industry report highlights that civil engineering firms are becoming reliant on state-owned expenditure, including spending by Eskom, Sanral, ACSA and Transnet.

The ironic e-tolling dilemma

The current predicament the South African National Roads Agency (Sanral) finds itself in -with the implementation of e-tolling on Gauteng’s roads on hold until the outcome of a court case – is of concern to Safcec.

Milne told Moneyweb the e-tolling system would guarantee Sanral a revenue stream which would then make it easier for the agency to raise third party funding.

If e-tolling became a reality and it was rolled out to other parts of the country, there would be substantial opportunities for the civil engineering industry.

He said that he does not believe that Sanral would be able to work at the tempo that it would like if e-tolling is scrapped in favour of, for example, the fuel levy.

“Postponement of the e-tolling may be a victory in the short-term, and putting aside the reasons why e-tolling “should” be cancelled altogether from a consumer’s point of view, the postponement of “payment” for critical infrastructure already implemented, of which R20bn is owed off shore, sends the wrong signal to potential investors and will downgrade South Africa’s international credit rating.

“South Africa has limited financial resources, and this will have a severe impact on the budget, which will inevitably have an impact on future road construction in the country. Already, new road construction is left primarily to Sanral as government set aside R25bn over the medium-term for road maintenance,” the report reads.

PPPs delay

Another factor impacting the industry is the problems with the public private partnerships-model (PPPs).

“PPPs are really an opportunity for the construction industry to bring project finance and carry out the design. Government can thus get assets without having to fund it themselves. It is a win-win. The problem is that it takes so long for some of these PPPs to come into fruition,” he said.

Milne mentioned the N1/N2 toll road in the Western Cape that was offered on a PPP basis and is now in “limbo” due to the court battle on e-tolls.

“Overseas PPPs take a relatively short time to award, which means that possible investors will take their money elsewhere,” he said.

Other findings

The report showed that employment fell by 7% since the first quarter of 2011, to 98 837, down almost 8 000 jobs in the last year.

It also showed a shift in terms of tender prices in the first quarter 2012. Fewer firms reported tender prices as keen (down quite strongly to 46% from 87% in the preceding quarter) and an increasing number of firms reported tender prices as “low” (37% from 13%).

The civil engineering industry has endured a period of severe contraction due to a decline in contract activity, which led to job losses.

On the positive side turnover improved by 28% in real terms in the first quarter of 2012, compared with the same quarter last year and order books seemed to be still benefitting from improved award activity in 2011.

Source: moneyweb