Infrastructure project award delays knock civil construction industry confidence

Delays in awarding infrastructure projects are believed to be responsible for confidence in South Africa’s civil construction industry dropping in the fourth quarter of this year.

Confidence levels deteriorated despite most of the underlying indicators, such as activity and profitability, improving in the fourth quarter.

The FNB/Bureau for Economic Research (BER) civil confidence index, released on Monday, dropped by two points on a 100-point scale to 15 in the fourth quarter.

This follows the index rising by four index points to 17 in the third quarter of 2021 despite most of the underlying indicators worsening in the third quarter of this year.

The current level of the index means 85% of civil construction respondents to the FNB-BER survey are dissatisfied with prevailing business conditions.

The index has been hovering around the 20-point mark since the middle of 2017.

Contributing factors

FNB Senior Economist Siphamandla Mkhwanazi said it is difficult to pinpoint the reasons behind the persistently weak level of confidence.

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Mkhwanazi said the low level of civil contractor confidence is justified although the further decline during the fourth quarter is at odds with some improvement in underlying activity.

“One possible qualification is that, even though the growth in activity is somewhat better this quarter compared to a few years ago, the total value of construction activity is still much lower.

The still low level of activity, in absolute terms, and delays in the awarding of tenders could have kept a damper on the business mood.

“An acceleration in the rollout of infrastructure projects by the state and further progress on structural and regulatory reform to boost private sector infrastructure spend would go a long way to alleviate the woes in this sector,” he said.

Looking ahead, Mkhwanazi said there are signs that activity could improve further even if only slightly.

Mkhwanazi said the rating of insufficient new demand as a business constraint declined from 89% in the third quarter of this year to 83% in the fourth quarter, which is its lowest level since the fourth quarter of 2020.

“Respondents noted that there is indeed an improvement in tender activity.

“However, tender awards are lagging significantly, and the validity of tenders is increasingly being extended.

“This means that, while there is interest, not all projects will be realised, or at best, be commissioned in good time,” he said.

Hope

Construction market intelligence firm Industry Insight said last month there is hope of a robust recovery in civil construction if the government can follow through on its ambitious plans to invest in large scale civil projects and incentivise the private sector.

However, it said in its latest SA Construction Industry Forecast Report that the non-residential construction segment is expected to come under increased pressure over the next 12 to 18 months because of big cuts to public sector spending and a severe lack of demand for commercial buildings with excess supply.

Industry Insight added that the civil construction industry seems to be emerging from the ashes and has finally reached a turning point “from absolute rock bottom levels”.

Reality

“This statement does however come with several caveats, as the robust tender activity we are seeing is not exactly translating into awarded contracts at the pace we would like, with extremely disappointing data so far this year,” it said.

In another report, Industry Insight highlighted data in a Statistics SA report that revealed that capital expenditure by the public sector on new construction works slumped to its lowest level in five years.

Industry Insight said investment fell by 18% year-on-year in 2020 to R116 billion but has been on a decline since 2016 when close to R200 billion was spent on new construction, including residential and non-residential buildings, roads, water and electricity.

Spending in 2020 was 40% lower compared to 2016, translating to R77 billion,” it said.

Industry Insight added that thanks to a few higher value projects awarded in September 2021, which is the latest available data, there was some improvement in the overall value of civil projects awarded compared to recent months.

The nominal value of civil construction projects awarded rose to just under R3 billion in September 2021, the highest value since March 2021, it said.

However, Industry Insight said despite the slump in April and May 2020 because of Covid-19 pandemic restrictions, and subsequent increase in tender activity, the total nominal rand value of projects awarded in the first nine months of 2021 is still 19% lower year-on-year compared to the same period in 2020.

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It said the number of awards also improved in September 2021, following four consecutive months of declines, but remains at low levels.

An uptick between February and May 2021 supported an overall increase of 24% year-on-year in the first nine months compared to 2020.

“Tender activity, in terms of the number of projects out to tender, slowed for the fourth consecutive month but remains above the average number of tenders issued during 2019 and 2020.

On average tenders increased by 12% compared to 2019 and by 36% year-on-year compared to Covid-19 restricted 2020,” it said.

Industry Insight said since several higher Construction Industry Development Board (CIDB) Grade 9 civil projects were put out to tender in September 2021, the estimated value of these tenders based on the distribution of tenders by CIDB grade, recovered to R5.7 billion from dismal levels in August 2021 when tender values barely reached R4 billion.

It said the majority of these tenders related to roads, mainly in KwaZulu-Natal, while two road tenders were also issued for other provinces.

One of these tenders was issued by the SA National Roads Agency (Sanral) in the Eastern Cape and the other by Trans African Concessions (TRAC), one of Sanral’s long distance toll concessionaires, in Mpumalanga, it said.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.