Construction in crisis

The South African construction industry is under siege and experiencing unfavourable business conditions at present, says Cees Bruggemans, chief economist of First National Bank.

Bruggemans was reacting to the FNB Civil Construction Index, out on Tuesday, which revealed a modest increase from an index value of 25 in the first quarter this year to 33 in the second quarter.

However, it compared with an index of 48 recorded in the corresponding quarter a year ago.

Bruggemans said it was conceivable that business confidence in the sector could drop further going forward and unless government projects took off soon, more retrenchments were likely to follow in the civil construction industry.

FNB noted that although the confidence level improved marginally, due to an apparent easing in tendering competition reported during the survey quarter, a confidence index of 33 nevertheless implied that 67% of the respondents still regarded current business conditions as unsatisfactory.

Bruggemans pointed out that the civil industry obtained 88% of its work from the government sector.

“With projects related to the soccer World Cup drawing to a close and the rescoping of work available from some public corporations (eg Eskom, which has fallen behind with its capital expenditure programme due to funding problems), construction activity is declining.

“Moreover, management skills deficiency and other constraints at the provincial and local government level are leading to under-spending on budgeted projects,” FNB said.

Bruggemans said the growth in construction activity in the second quarter of this year deteriorated compared to the first quarter of last year.

Whereas a net 69% of respondents in the previous survey indicated that the growth in construction activity was below that of the same quarter a year ago, the corresponding figure in 2Q2010 was a net 80%.

Bruggemans said due to the scarcity of new construction work, margins came under pressure, which adversely affected the growth in the overall profitability of businesses.

“In this regard, a net 69% of respondents reported lower profitability growth compared with the same quarter a year ago. Respondents had very little choice, in view of market developments, but to resort to the retrenchment of labour.”

Compared to a net 40% in the first quarter of the year, a net 69% of respondents in the second quarter indicated that growth in employment was below that of a year ago, FNB said.

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