Regional Report: Southern Africa - What now?

By Chris Sleight13 October 2011

South Africa is in a lull following the construction boom that led up to the World Cup.

South Africa is in a lull following the construction boom that led up to the World Cup.

After the flurry of activity that led up to last year's soccer World Cup in South Africa, the construction industry has fallen into something of a lull. One of the reasons for the slowdown is the tightness of public spending, following the binge on infrastructure and stadiums for the tournament.

Indeed, in its interim results earlier this year, Aveng - one of South Africa's three largest contractors - said only 18% of its domestic workload in the six months to the end of December, 2010, was publicly funded. It also said that all of the growth in its order book came from outside South Africa.

Figures for the full year to the end of June from major contractor Group Five pointed to a definite slowdown at home. CEO Mike Upton said, "Last year set a high base as results included large 2010 infrastructure contracts. In contrast, this year saw significantly diminished market activity and contract delays."

The company's revenues for the year were down -19%, and it has put a focus on winning work outside of South Africa - even as far afield as the Middle East - and focusing on sectors such as mining, rather than low margin construction work.

But at the same time the need for South Africa to invest in its infrastructure is indisputable. Infrastructure development is one of the key priorities for the government, and as iC went to press the National Planning Commission was due to put a draft development plan out to consultation, which will lay out key aims and objectives up to 2030. The final plan will be put to the parliament before the end of the year.

Infrastructure development is likely to be a big feature because it is key to achieving wider policy aims like poverty reduction, rural development and job creation. In South Africa's case, the need is for infrastructure in the widest sense - not just transportation links, but water, electricity, housing and more.

As Aveng CEO Roger Jardine said, "The National Planning Commission has identified under-investment in public infrastructure spend as a key issue affecting the growth trajectory in South Africa. The construction industry as a whole will benefit from the unlocking of this spend."

Some strides have been taken in the last year. For example, the 2010/11 annual report from the office of the President of South Africa says that last year saw 102000 households equipped with an electricity supply, while on a larger scale, six regional bulk water projects were constructed, eight dams were rehabilitated and over 3000 water licence applications were finalised.

Cartel investigations

One of the reasons that government agencies are reluctant to let projects out at the moment is that much of the construction sector is embroiled in price fixing allegations. The last few years have seen a number of relatively small cartels uncovered, mostly in the supply of materials or specific construction products.

This March saw Aveng hit with a ZAR 129 million (US$ 18.7 million) fine for collusion with competitors by its subsidiary Steeldale Mesh on the price of mesh and rebar. There have also been fines for Aveng and others in areas such as the supply of roof bolts, pre-cast concrete pipes & culverts and in foundations contracting.

However, this year has seen South Africa's Competition Commission tackle the general contracting market head-on with an investigation into 70 projects worth a total of ZAR 29 billion (US$ 3.6 billion), where it says prices may have been fixed.

Among those troubled by the investigation has been Murray & Roberts, which has taken advantage of leniency procedures and a fast-track settlement process to deal with projects undertaken by its subsidiary Concor, where competition laws, "may have been transgressed through the unauthorised actions of senior executives."

The company has made a provision of ZAR 1.9 billion (US$ 282 million) in its figures for the year to the end of June 2011 to pay any fines.

Group Five and Aveng subsidiary Grinaker-LTA have also lodged applications for leniency with the Competition Commission. The Commission says most of the applications have come from Group Five, and as a result, it looks like the company may escape fines.

A statement in from Group Five in August said, "Group Five took a very proactive stance with the Commission and completed intensive investigations in its business during 2009 and 2010 to ensure full discovery of any infringements. We signed a conditional leniency agreement on 29 July, without penalty, pending conclusion of the Commission's industry investigation. We have therefore not raised any provision for fines."

Both Aveng and Murray & Roberts say they are co-operating with the Competition Commission's investigations. The Commission says it has received more than 150 applications for leniency relating to its investigation. The outcome of the investigation is yet to be published.

Private projects

With publicly-funded construction looking a troubled sector, there is a tangible move towards privately funded schemes, but these too have their problems. For example, September saw the Protea Parkways Consortium, comprising Group Five, Basil Read and Bouygues named preferred bidder for the Winelands toll road project in the Western Cape.

The 175 km, ZAR 10 billion (US$ 1.25 billion) project was due to start in February and take three years to complete. However, a disagreement between the City of Cape Town and the South African National Roads Agency (SANRAL) has seen the city government threaten legal action against the scheme.

One objection centres on the environmental impact assessment, but more fundamental seems to be the city's objection to developing the project as a public-private partnership (PPP), which would see it operated as a toll road under a 30 year concession agreement. The key criticism is that the use of tolls would make the road inaccessible to poor rural communities, and this has sparked the call for a national debate on the future of toll roads in South Africa.

Power concerns

Another big area for South Africa is the energy sector. Its problem is not so much the supply of fuel - according to the BP Statistical Review of World Energy, South Africa is sitting on more than 30 billion tonnes of coal, which is about 3.5% of global proven reserves and enough for almost 120 years of extraction at current rates.

The issue is more that of power generation. State-owned electricity company Eskom generates 95% of South Africa's electricity and has had to put a range of measures in place to keep the lights on over the peak winter demand period.

The company says demand was reduced this year due to relatively brief cold spells and strikes in the metals and mining industries. At the same time the supply side was improved by bringing in power from municipal generators and independent power producers. The company is also putting a strong emphasis on energy saving programmes.

However, the need for power is well recognised, and Eskom has plans to build another 17 GW of generation capacity by 2018 as well as upgrading the transmission network.

A big landmark will come next year when the first generator at the massive Medupi coal fired power station goes on-line. Five further generators are scheduled to come on stream at nine-month intervals until the entire 4.8 GW complex is completed in 2015.
Also under construction by Eskom is the Kusile coal-fired power station and the Ingula pumped storage facility.

Bright future

After the furore of the World Cup, it was perhaps inevitable that the Southern African construction market would pause for breath. That pause may have been longer than expected due to the industry's unethical collusion, but once this issue has been settled the sector should be able to move on and start building the infrastructure that is so vital to the region's development.

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