The many factors conspiring against infrastructure spending do not bode well for SA’s listed construction players.
Murray & Roberts’s decision to exit SA infrastructure and building markets has shown up large cracks in the economy.
It comes despite government plans to spend R4trillion on 18 categories of strategic infrastructure projects over 15 years, of which hundreds of billions have already been spent.
The exit excludes the company’s shareholding in Gautrain operating companies that, according to Murray & Roberts CEO Henry Laas, are still in “fierce” litigation with the Gauteng provincial government. It also excludes projects being wound up in the Middle East, where no new business will be pursued.
The decision by one of SA’s top construction and engineering groups may provide a significant opportunity for black economic empowerment. But what it really shows is that civil infrastructure development, such as in the mining and steel industries, is being held hostage by poor government industrial policy design and implementation, amid the fury and chaos of national politics.
The infrastructure and building segment of the construction industry undertakes large civil engineering and earthworks projects — constructing power plants, dams, major roads, bridges, pipelines and large buildings, and also facilities such as the City of Tshwane’s Zeekoegat waste water treatment plant.
“In SA, the civil engineering and construction market is not strong and has not returned to the levels it should be at,” Laas says.
Murray & Roberts says its “new strategic future” lies in three multinational business platforms providing services to selected oil and gas, metals and minerals, and power and water markets.
The domestic civils industry has languished since the end of the 2010 Soccer World Cup. Megaprojects such as the Gautrain and Sanral’s Gauteng freeway improvement projects, along with soccer stadiums, have not been replicated.
But now that a major JSE-listed SA construction and engineering group is in the process of selling up a core business, it is worth looking at what this means.
One hint comes from Buildmax, a much smaller listed group that casts itself as a leading empowered opencast mining contractor, and one of SA’s biggest in the coal-mining niche.
The company also provides bulk earthworks and construction materials to the mining and construction industries. It says trading conditions in these sectors are dismal. But apart from slowing growth in China and poor demand in Europe for mining commodities, it says Eskom’s poor management of coal off-take, coupled with the utility’s pressure on mines and service providers to be 50% plus one share black owned, have stymied capital projects.
“The market for opencast mining services has diminished, triggering an oversupply of services, increased competition, lower prices, cautious lenders, bearish investors, labour and community unrest, and a general liquidity crunch in the sector,” Buildmax says.
The same could be said of the general construction and engineering industries for the past six years. The lousy trading environment has been made worse by a global surplus of second-hand plant and a substantial drop in second-hand values.
Combined with a weaker rand, there has been a huge increase in the cost of new plant, which constrains companies from replacing and financing equipment. This in turn has deeply hurt JSE-listed companies such as Eqstra, which provides earth-moving machinery.
On the positive side, there has been evidence of public-sector spending on much smaller-scale projects, including for human settlements and associated infrastructure. This includes the building of schools, clinics, hospitals, and also the roads, water, electricity and sewerage systems that serve them. Much of this is in rural areas.
This has benefited smaller JSE-listed building and materials groups, and thousands of “bakkie and spade brigade” outfits.
But it remains to be seen if there are costly comebacks in future, similar to widespread quality concerns over low-income housing developments that resulted in remedial actions costing billions of rand a few years ago.
Parliament was told in reports from the National Home Builders Registration Council, the Construction Industry Development Board, and the public protector that flawed procurement processes and corruption were major causes of shoddy work in the construction of reconstruction & development programme houses for the poor.
Now, amid allegations of the capture of state-owned entities, and with memories of the Marikana massacre of mineworkers by police still fresh, SA’s economy is hurting.
Mining is in crisis, along with SA’s steel sector, and parastatals ranging from SA Airways to PetroSA have lost many billions of rand.
Projects such as Eskom’s Medupi and Kusile power stations are plagued by cost overruns due to often violent labour unrest and long technical delays. The ANC has also been seen to have unduly benefited from its past relations with Japanese contractor Hitachi on such projects, to the tune of billions of rand.
Meanwhile, the intrigues encompassing the Passenger Rail Agency of SA (Prasa) and state arms manufacturer Denel are a long way from the austere public interest that is mandated for the running of state enterprises.
Bad blood between government and the construction industry spilt over at the end of the 2010 Soccer World Cup.
The state felt it was being ripped off by collusion among contractors — including cement and steel producers — over its plans for infrastructure development.
This eventually resulted in about 15 large and lesser-known construction and engineering groups agreeing to pay a collective R1.5bn in penalties to the competition authorities.
Some of these groups continue to deny some charges.
Subsequently, SA’s largest steel producer, ArcelorMittal SA, also agreed to pay a R1.5bn fine for monopoly pricing.
Infrastructure takes up about 50% of steel production in SA. In simple terms, it is made up of construction and building segments, where confidence has been low in recent years.
At the same time ArcelorMittal SA has been pressured into a long-delayed black economic empowerment transaction.