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NEWS: Construction industry to bounce back in 2021

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South Africa’s construction industry is expected to bounce back in 2021 after being the sector with the poorest performance in 2020.


David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, is however anticipating “a reasonable bounce back” by the civil industry – though he believes the opportunities for an improvement in the building industry are limited.

Statistics SA data shows that the civil industry contracted by just more than 18% in 2020 while investment in the residential building industry contracted by 20.9% and the non-residential building industry by 25.3%.

Not an ‘essential service’

Industry Insight attributes the construction industry GDP being down by “a crippling 20.3%” in 2020 to the fact that, unlike other countries, the construction industry was not declared an essential service in South Africa during the hard lockdown period in April and May 2020 and the government and the private sector disinvested massively from both the building or civil infrastructure segments of the industry.

ALSO READ: Greater infrastructure spend needed to help construction sector gain stability

Metelerkamp says the civil industry performed slightly worse than forecast in 2020 while the performance of the residential and non-residential sectors, despite being extremely poor, was slightly better than forecast.

He says the civil and building industries are both coming off a low base and expects “an about 10% bounce back” by the civil industry in 2021 but opportunities for an improvement in the building industry to be limited and for it to achieve “low single-digit growth in 2021”.

“The data is definitely better for civil construction because there are a lot of big projects coming out for tender and there are tenders that are being awarded.

“That is the positive but the negative is the state of the fiscus, which is a big worry but probably more in the medium term. Then there is also the implementation paralysis that economists talk about in terms of implementing all of these Sips [Strategic Infrastructure Projects],” he says.

Despite slightly improved prospects for the civil industry, Metelerkmap stresses that investment in the civil industry will get “nowhere near to previous levels”.

ALSO READ: Government unable to lift construction sector ‘out of the ashes’ on its own

He says about R170 billion was invested in the civil industry in 2020 and Industry Insight is only forecasting this to improve to R150 billion in 2025.

Metelerkamp says building prospects are very limited and “a big bounce back” in private sector demand for housing and shopping centres unlikely.

“We have definitely moved onto a lower growth path going forward for the next five years at least, despite building coming off a very low base.”

Solutions

Business Leadership South Africa (BLSA) – in a report released in March on solutions to boost infrastructure investment to support government’s efforts to drive economic recovery – highlighted that while business, government and their social partners have agreed that greater investment is important, the reality is that over the past five years investment volumes have been falling further from the National Development Plan’s target of 30% of GDP per year.

It said infrastructure investment has fallen sharply over the past six years from 20.3% of GDP in 2015 to 17.9% in 2019.

This decline has been particularly clear in public sector spending with both state-owned enterprises (SOEs) and main budget spending on infrastructure falling from 7.3% of GDP to 5.4% over the same period, it said.


The BLSA report identified several factors that have contributed to this trend, including skills shortages, the weak balance sheets of SOEs, excess capacity in the private sector, complex procurement regulation and poor investment-driving policies.

Industry Insight said an analysis of client investment unsurprisingly revealed that the private sector heavily disinvested in the construction sector in 2020, but SOEs also massively disinvested in the industry – which was more unexpected.

“This is disappointing given that they are generally the biggest spenders in the construction sector.

“What could be seen as more encouraging is that ‘general government’ actually increased their investment in the civil industry, for example, by 2.5% in real terms while SOEs disinvested in civil infrastructure by 27.2%.

“Nonetheless, this is a worrying trend as a lack of investment continues to damage the productive capacity of the economy, potentially shifting the economy onto an even lower expected growth path,” it said.

Interventions

The BLSA report recommended several interventions to improve the volumes of infrastructure investment.

Among other things, it called for structural reforms in energy, mining and spectrum availability to rapidly boost private sector investment, which can be achieved at no cost to the public purse; greater use of public-private partnerships (PPPs) to bring together the strengths of the sectors to deliver maximum value for investment to the public; reforms to the PPP framework, with complexity aligned to project size and risks; and for PPPs to be used more by SOEs to overcome balance sheet constraints

BLSA CEO Busi Mavuso said everyone knows that infrastructure investment is key to unlocking South Africa’s economic potential but “the reality is that we have been falling short of our own goals for greater investment”.

Mavuso said the BLSA report emphasises the need for key policy reforms to unlock infrastructure investment.

“There is a lot that business can do, from funding and building infrastructure to operating it, and we want to work with the public sector to achieve far greater investment levels.”

Metelerkamp believes more efficient spending by SOEs and government could, if achieved, be a major driver of an improved performance by the construction industry in 2021.

“Even with cuts to infrastructure spending, it will go a long way towards boosting overall output for the sector because there is so much waste, so much mismanagement and so much corruption with this sort of investment,” he says.

“The efficiency of government expenditure on infrastructure is absolutely crucial because the construction industry is a vital part of the government’s economic recovery and stimulus programme.”

Source: Moneyweb

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