Construction industry needs a boost
Construction sector activity in South Africa has recovered well from the debilitating effects of the Covid pandemic, but a need clearly exists for the public sector to revive its involvement with infrastructure projects.
According to the findings of the Afrimat Construction Index (ACI) for the fourth quarter of 2022, construction activity during October to December last year outperformed the economy as a whole on a year-on-year basis, but not on a quarter-on-quarter basis.
The ACI is a substantially more comprehensive barometer of the state of the construction sector than the GDP data, as illustrated by the fact that two of its indicators, the value of wholesale trade in construction materials and hardware sales (retail) amounted to a combined R69.7 billion in the 4th quarter, compared to a construction sector contribution to GDP of only R36.8 billion.
Five of the nine individual indicators comprising the ACI managed to record increases in the 4th quarter, compared to the same quarter in 2021. Over the past year, the star performer of the index was the value of wholesale sales of construction materials, with an improvement of 9.3%. Hardware retail sales provided a boost to the ACI on a quarter-on-quarter basis, with an increase of 8%.
Two key reasons for the continued sluggishness experienced by the construction industry are the sharp increases in interest rates and the dire state of the country’s municipalities.
In line with orthodox macroeconomic theory, higher interest rates are inversely correlated to GDP and, as a general rule, also lead to subdued construction and property market activity. It is not surprising, therefore, that new mortgage bond approvals administered by BetterBond started to embark on a declining trend from the end of 2021, when the Reserve Bank’s hawkish monetary policy kicked in. Since then, the cost of credit (and capital), measured against the prime overdraft rate, has increased by 54%.
Dysfunctional municipalities also serve to explain part of the problem with the declining trend in public sector infrastructure spend. National Treasury, which is prepared to transfer an amount of more than R61 billion for infrastructure spending to the provinces and local governments in the current fiscal year, has admitted that, out of a total of 257 municipalities, there are 175 that might be on the brink of a crisis. Of these, 151 municipalities are deemed “bankrupt and insolvent”, and are unable to pay creditors and third parties, including the South African Revenue Service and pension funds.
It seems fairly obvious that the majority of the country’s municipalities are simply not in a position to spend transfers from National Treasury ear-marked for infrastructure in a manner commensurate with the needs of their respective communities.
The Centre for Risk Analysis (CRA) has recently published a report that identified gross mismanagement and unsound governance as major reasons for operating deficits at local government level. Gerbrandt van Heerden, Deputy Head of Research at the CRA and author of the report, has recommended that, in order to restore municipal performance, appointments should be made exclusively on merit; that underperforming officials be dismissed; and that corrupt officials be prosecuted.
The only way to improve the ability of local governments to repair, maintain and expand infrastructure is for comprehensive private sector involvement at every stage of the process - from planning and tender evaluation to execution and monitoring & evaluation. Hopefully, this approach will become more prevalent in 2023.
Fortunately, some signs of life in the construction sector have been forthcoming from the FNB/BER Civil Confidence Index, compiled by the Bureau for Economic Research at Stellenbosch University, which increased to a six-year high of 42 in the first quarter of 2023, from 31 in the previous quarter. According to the BER, sentiment in civil construction has now improved for four consecutive quarters. Underpinning the improved sentiment was a marked increase in activity, which also boosted profitability.