SA skills shortages leading to hindered growth, survey reveals

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Shortage of skills constraining growth in South Africa's Construction Industry, Construction Industry Development Board and Bureau for Economic Research SME Business Conditions Survey for 2016 Q1 reveals. Shortage of skills constraining growth in South Africa's Construction Industry, Construction Industry Development Board and Bureau for Economic Research SME Business Conditions Survey for 2016 Q1 reveals.

General builder confidence declines from 46% to 44% in the first quarter of 2016, which is the result of a slowdown in building activity and increasing pressure on profitability.

This is according to the Construction Industry Development Board and Bureau for Economic Research SME Business Conditions Survey for 2016 Q1, which was carried out from January 25 to February 29 this year.

The survey shows general builders in Grades 5 and 6 and Grades 7 and 8 registered higher confidence levels, improving by five and nine index points respectively, while general builders in Grades 3 and 4 shed 24 index points.

Despite the uptick among Grades 7 and 8, confidence remains well below the 50point mark that separates contraction from expansion. Regionally, business confidence ticked up in the Eastern Cape and KwaZulu-Natal. In contrast, general builders in the Western Cape and Gauteng were less satisfied with current business conditions than in the fourth quarter of 2015.

Civil contractor confidence declined marginally from 41 to 40 in 2016 Q1. This implies six out of every 10 respondents find business conditions unsatisfactory. Compared to a year ago, business conditions deteriorated, construction activity slowed, retrenchments increased and pressure on profitability increased.

Across the grades, civil contractors in Grades 7 and 8 were the only grades that registered higher confidence. Business confidence among Grades 3 and 4 and Grades 5 and 6 declined by 9 and 8 index points respectively. Regionally, Gauteng improved by nine index points whereas KwaZulu-Natal, the Western Cape and Eastern Cape decreased by two, five and 12 percentage points respectively.

“The decline in business confidence can be attributed to a real or perceived decrease in infrastructure spend, delays in project awards and increase in project cancellations,” says Dr Rodney Milford, programme manager, construction industry performance. “Furthermore, there is increased competition.”

PwC’s third edition of SA Construction confirms these survey results reporting that SA’s construction industry faced a challenging year in 2015, marred by industrial action, substantial delays on projects, as well as questions raised around safety concerns on structural projects.

“2015 proved to be a tough year for most construction companies, with lower revenue and profit margins, and fewer new projects in the offing,” says Andries Rossouw, PwC Partner. The PwC study findings are based on the financial results of the leading construction companies listed on the Johannesburg Stock Exchange (JSE) for financial year end to June 2015.

Rossouw says the construction industry is cyclical in nature and the cycle is not in its favour at present.

The 2015 financial year saw a decline in market capitalisation and financial performance. Eight of the nine companies reflected a decrease in market capitalisation. In aggregate for the nine companies analysed, market capitalisation decreased by 38% to R25.9bn as at June 30 2015 (R41.6bn as at June 30 2014).

Lack of access to work, according to the survey, remains a constraint for both general building and civil engineering class of works across all grades, at a net balance of 70%.

The survey indicators relating to business constraints are presented in percentages, for example an insufficient demand for work index of 70 implies that a net balance of 70% of the respondents regarded lack of demand for work as a constraint.

“This is due to a number of reasons, such as decreased spending in infrastructure for government and the private sector that can be clearly seen from the gross fixed capital formation data from the South African Reserve Bank, which shows that in 2015 there was only 6.5% real growth for general government for 2014-15,” says Milford.

“This is down from 18% real growth from 2013-14, which is an indication of government’s current constrained resources.

“There was also a 0.3% real decrease for the private sector for 2014-15, which was 7% lower than the year-on-year growth for 2013-14 — this shows the extent of the persistently weak business confidence, which has led to lack of investment from the private sector.”

Rossouw says the government’s ongoing National Development Plan and its continued commitment to public infrastructure investment of R870bn over the next few years are still positive signs for future growth.

PwC’s SA Construction says this is the first time in five years that the secured order book decreased (4%) on the prior year. The secured order book covers 1.3 times current year revenue, in line with the prior year as the lower order book was mirrored by lower revenue. Subsequent company reporting to February 2016 indicate a further order book decline, albeit only marginal.

Total revenue decreased by 7% to R129.3bn on the prior year mainly as a result of a decrease of R8.6bn from Aveng, a R5.4bn decrease from Murray & Roberts and a R1.6bn from Group Five partially offset by a R0.3bn increase from WBHO and a R1.4bn increase at Stefanutti Stocks. These decreases were largely as a result of the weaker economy, in particular for commodity markets with a notable decrease in revenue from oil and gas projects.

Total operating costs decreased by 5% in response to lower revenue. Staff costs continue to represent a significant component of operating costs constituting 29% of total operating costs (2014: 28%). Subsequent results reported to February 2016 indicate an improvement in profitability despite a further decrease in revenue.

“Cash generated from operations increased by 2% on last year from R4.3bn to R4.4bn. Solvency and liquidity ratios remain reasonably strong and remain in line with the previous year at 1.6 and 1.3 respectively,” says Rossouw.

The survey shows that competition in the industry is another constraining factor, the number of companies competing in the industry is not aligned with the demand or spending of government and the private sector.

It says the increase in registrations of contractors wanting to participate in the public sector contracts is in contrast to the low business confidence and decrease in construction spend.

The shortage of skilled labour is the second highest constraint, but is less of a constraint in civil engineering Grade 7 and 8.

“The majority of contractors rate the shortage of skilled labour as a constraint to growth and to profitability. Without the proper skills, contractors struggle to complete their projects timeously and successfully, which impacts on their profit margins as well as quality of the work done,” says Milford.

“SA’s construction industry is well placed to cope with new growth requirements as well as take on large-scale projects. But it will need to manage short-term liquidity requirements,” adds Rossouw.

Read more on:

Construction Industry Development Board (CIDB)  |  PricewaterhouseCoopers (PwC)  |  Andries Rossouw  |  Rodney Milford  |  Bureau for Economic Research (BER)