THE South African Federation of Civil Engineering Contractors (Safcec) yesterday noted industry confidence of less than 50 out of 100, reflecting short-term pessimism in the engineering and construction sector.This was in line with its view that the industry could decline by 10% in real terms next year.
“Competition for tendering is heating up, and companies complain of a predatory mind-set, which will increase the risk for contractors engaging in Maverick pricing and very possibly lead to the demise of contractors over the next two years,” said Safcec economist Pierre Blaauw.
That was in stark contrast to double-digit real growth from 2005 to last year in civil contracting on state infrastructure investment. Real growth of 5% was expected for this year, but a decrease was expected next year.
The global financial crisis was in part to blame with large clients facing lack of liquidity as well as a decline in demand, particularly with Eskom and Transnet. “I say in part because 38% of the medium-term expenditure framework budget has been allocated to provincial and local government, which seems to be struggling with delivery and wrought with financial difficulties,” Blaauw said.
Yet Safcec did not expect activity to drop to pre-2000 levels. “Most likely there will be volatility at a more ‘normalised’ level.”
Infrastructure requirements held great promise in the medium to long term, and current levels would probably “once again be achieved and surpassed at the end of 2012 to 2013”, Blaauw said.
Ernst & Young director of assurance Ebrahim Dhorat said that in the construction sector the size of a company and its projects were key determinants of risk. Industry companies could be separated into two classes. In one were companies that “at the first signs of a decline in business or a downturn have the foresight and ability to flex their business model and to refinance their debt or create liquidity”, Dhorat said. In the other class, companies were slower to react and affected more by business-environment change, “which may lead to failure”.
Ernst & Young said the global credit crisis and recession highlighted the need for companies to be more agile and flexible.
The group reported results of its survey of Fortune 1000 companies on risk management. Leading organisations expanded the scope of risk assessment, scanning the broader business environment for emerging risks.
“Through more comprehensive risk assessments, these organisations are examining their entire value chain — including suppliers, customers, competitors, business partners and key stakeholders — to define emerging risks and opportunities.
“What we are finding from leading organisations in the construction sector is the emergence of a new performance agenda.”
The top four trends Ernst & Young noted were re-evaluation of business models, optimising capital availability and deployment, accelerating decision making and execution and strengthening stakeholder confidence.
“We still hold the view that intrinsically the sector is sound but access to funds for projects is hampering development,” said Dhorat. But Dhorat expressed concern that unaffordable power price hikes would restrict growth and projects would be cut back “if a long-term solution for the recapitalisation of the power sector is not found”.