Upload
phidesigner
View
215
Download
0
Embed Size (px)
Citation preview
8/2/2019 Ivan Diaz(16360613) Economics (R01)
1/14
Construction Industry in South Africa 2010
Ivan Diaz
16360613
Cell: 0826529423
Subject: Economics for Managers
Number of pages: 10 pages
Due date: 23th of August of 2010
Group: MBA Modular E1 2010
Lecturer: Prof Andr Roux
Research, Report, Template
Office use only: Date received:
8/2/2019 Ivan Diaz(16360613) Economics (R01)
2/14
ii
8/2/2019 Ivan Diaz(16360613) Economics (R01)
3/14
iii
Table of contents
1 INTRODUCTION 1
2 THE CONSTRUCTION INDUSTRY IN SOUTH AFRICA 2
3 THE INDUSTRY CHALLENGES AND POLICIES 3
3.1 Barriers to entry the market 3
3.2 BEE policy implementation 5
3.3 Industry lack of skills 6
3.4 Sustainable development 7
4 CONCLUSION 8
5 REFERENCES 10
8/2/2019 Ivan Diaz(16360613) Economics (R01)
4/14
iv
List of tables
Figure 3.1: DBSAS consolidated capital cost FIFA 2010 stadiums. 4
8/2/2019 Ivan Diaz(16360613) Economics (R01)
5/14
1
1 INTRODUCTION
It might be still quite soon to assess the overall impact and benefits that, as a nation, South Africa
will retain by having successfully hosted the 2010 FIFA World Cup TM, but what is indisputable, is
the fact that the works delivered by the construction industry were remarkably impressive, underinternational standards, and these will remain as landmarks for the collective memory, as a
reminder of the capacity of South African people is capable of doing when striving to achieve a
common goal.
According to the Organization for Economic Cooperation and Development, [OECD](2010) the
national economy has started to show signs of positive growth as consumer expending has
resumed; the global environment starts to show less harsh economical conditions; trade volumes
begin to pick up, and output of capital investment goods is expected to growth after 2010. Together
with these signs of arousing economical performance, the construction industry in South Africa
seems to finally rose from many years of sluggish growth, and from a sectorial perspective, is
starting to over perform the manufacturing and mining industry.
The booming in the construction industry triggered, both directly and indirectly, by this event was
not limited to South Africa but extended thought to the region. Materialized in huge communication
projects such as the submarine optic fiber cable connecting the African continent to India, the
Middle East, Europe and Brazil, as well as infrastructure investment in the neighbor countries; as
was the case of Mozambique who invested heavily on rehabilitation of railway and general
roadwork network, resulting not only in improved interregional trade capacity but also in a wide
range of employment and market opportunities (Government preparation 2010)
Both, the momentum created by the large governmental and private investment for the 2010 World
Cup event, and the strong macro-economic policy framework that has characterized South African
fiscal policy for the last two decades, allowed the country to cope relatively well with the global
economical meltdown. Nevertheless, it was not with out highlighting the significant unemployment
issues and the critical need to maintain a policy that ensures sustainable growth and creates
enough incentives to attract investment in labor-intensive projects with a superior managerial
perspective.
8/2/2019 Ivan Diaz(16360613) Economics (R01)
6/14
2
2 THE CONSTRUCTION INDUSTRY IN SOUTH AFRICA
In a developing country such as South Africa, the construction industry plays a major role as a
mechanism to reduce poverty and unemployment levels. According to the OECD (2008) this sector
accounts for about 3.8 per cent of the national GDP and employing nearly 750,000 people, thisindustry is the third major employer sector in the country, and is the fourth employer of workers
with no formal education, after agriculture, household and mining. Therefore the responsibility the
construction industry bears is great, from delivering projects and services that are sustainable in
the largest sense to creating innovative solutions that are fit-for-purpose and economically viable to
operate, adding, as a result, value to all stakeholders.
Preceding 2010, in a pursuit to develop the construction industry in South Africa, the government
established a fiscal strategy of infrastructure investment that included under its scope: rail freight
services enhancement, energy supply increase, communication infrastructure upgrading,
transportation capacity improvement, airport capacity enlargement, and different refurbishing works
together with new construction projects for the sporting venue facilities to host the Soccer World
Cup event. All of this, according to the Government Communication and Information System
[GCIS](2010), with the purpose to contribute R 51,1 billion to the countries GDP, create more than
80.000 jobs in the hospitality industry, and a further 116.000 in the construction industry.
Great effort was put into expanding the transportation infrastructure, which included the expansion
of the International airports of Johannesburg and Cape town, the construction of a green field
airport project in Durban and the expansion and refurbishing of other seven domestic terminals.
The network of roads and railways required to make the connections to these buildings more
efficient, also generated a further thrust in the inflow of capital invested for projects such as the
Gautrain speed train and the enhancement of several major highways across the country.
The tourist and hospitality sector were also greatly benefited from the thriving industry and
inherited several four and five start hotels all across the country, numerous resorts and casinos
were approved for construction, as well as several projects to improve connectivity between CapeTown, Namibia and the Kruger National Park to maximize business opportunities (GCIS 2010).
The development of this sector is projected to accelerate, but the macro-economical policy of large
fiscal stimulus may still be required, for at least, until the private sector recovers strongly enough to
keep up with the expected growth trend, given that, the civil sector is by nature highly dependent
on government spending and any decline of this type of incentives will have a great impact on the
employment and growth performance levels.
Nevertheless, this fiscal stimulus its starting to raise concerns upon private investors, since
evidence of inflated costs and speculative prices of construction materials and services, has been
8/2/2019 Ivan Diaz(16360613) Economics (R01)
7/14
3
driven by the increased demand generated by government spending, negatively affecting the
intended growth, due to the fact that, the private sector is not able to compete with purchasing
power against the government, and the increased production cost goes directly in detriment of its
expected return margins. On top of that, the office, retail and commercial sub-sector are also
beginning to show evidence of saturation of space supply (BOUTEK 2004), which can translate
into a slow decrease on demand from the other sectors of the economy.
It is important to mention, that the relatively good performance of the market has not rely only in
the huge concentration of effort from the government to spur the economical development via the
construction industry through out the 2010 scenario, but a key roll to prevent the economy from
collapsing was played by the conservative fiscal policies and the strong performance of the
financial sector, based on diverse circumstances such as the low levels of bad debt loan, the South
African banks strong historical profitability and the low direct exposure to the troubled assets from
US and EU (OECD 2010).
3 THE INDUSTRY CHALLENGES
3.1 Barriers to entry the market
Due to the legislated bidding process to award construction contracts, and the relatively short
length of time of the projects, the construction industry is characterized by a transitory market
concentration, which unintentionally creates in this way, a dynamic in which a couple of large well-
established construction firms, due to their specific accumulated expertise, are the only ones
capable to bid for particularly important size projects (OECD 2008). This ends up driving the
market into a high level of concentration, relegating small companies to seek profit or sustain their
business from a marginal outskirt of the mainstream market.
Vertical backward integration practices also characterize this market, where a handful of large
companies dominate the entire production chain and services supply, from the extraction of
construction materials to all sorts of sub-sectors created at the other end of the construction
process; making even more difficult for new, small or foreign companies to enter and compete in
the market and increasing on the other hand the possibility of synchronized behavior inside the
long production process as it facilitates information sharing. (OECD 2008)
The size and complexity of the infrastructure required by the nation, further promotes the
concentration of the market, by demanding from the contractors to create joint ventures as a
mechanism to allow them to reduce the risk involved and effectively tackle the complexity of these
projects. However, according to the findings of a study prepared by the OECD-Policy Roundtables,
(2008), this mechanism is rather most often used by the large well-established contractors and not
by the easily presumed small companies who could very well take advantage of such venture
8/2/2019 Ivan Diaz(16360613) Economics (R01)
8/14
4
strategies to joint efforts and better compete in the market.
As a result, the combination of the nature of the business, the size of the projects demanded and
the fiscal regulations to adjudicate contracts combined, facilitate the creation of cartels, which
promote the manipulation of prices, market allocation and collusive conducts, and in many
instances abuse their inference on the market by limiting the supply of materials, arranging
exclusive deals or practicing exclusionary practices to guarantee their privileged position in the
market.
A relevant example, currently under investigation by the Development Bank of South Africa [DBSA]
(2006) (cited in OECD 2008, p. 147), is the total cost of building the 2010 FIFA World Cup
stadiums and how it dramatically increased from the initial budget estimated in 2003 and the
requested budget on 2006. Differences in costs are shown in Table 1. Even when this increase can
be attributed to the size and complexity of the venues designed, and the fact that these were
planned as permanent structures instead of temporary ones, there is a general concern about the
large variability in the construction cost.
Table 3.1: DBSAS consolidated capital cost for the construction and refurbishment of FIFA
2010 stadiums
Source: OECD, Policy Roundtables - Construction Industry, 2008: 147.
If part of the increase cost were effectively attributable to the onerous design of the venues, one
would have to consider the fact that many of the primary design features are set before any
accurate cost analysis is concluded. Accordingly, given that more often than not, the scope of work
is drastically reduced, with the reciprocal diminishing of the consultants marginal profits, design
teams are often disinclined to redesign and readjust the main design parameters, fueling a cycle in
which, due to the narrow marginal profits, the consulting companies cant afford to invest in
improved tools and innovative integrated procedures, which would make the design process much
more accurate and cost effective.
8/2/2019 Ivan Diaz(16360613) Economics (R01)
9/14
5
3.2 BEE policy implementation
Like all affirmative action policies implemented around the world, BEE seeks to regulate the
allocation of scarce opportunities in many areas including: education, employment, or business in
order to increase the representation of persons belonging to certain groups which were previously
unfairly excluded Fryer and Loury (cited in Khatletli 2008, p. 285). Ironically, in this industry, the
delivery is expected to come from the well-established historically white-owned companies, which
due to the barriers of entry mentioned before, are virtually the only ones capable to provide
relevant expertise and training, which is projected to be transferred to the emerging black
contractors as part of the BEE policy (Khatletli 2008).
The governmental strategy is to increase black participation through policies and regulations that
stimulate the creation of joint ventures between large firms and small contractors, putting pressure
on the larger company to formalize the contract in a way that allows and secures participation of
previously disadvantage people. Unfortunately, the industry has not been able to transfer this
expertise and set of skills at the pace demanded, almost certainly because of the way contracts get
structured, given that management power and enterprise knowledge is not properly and equally
shared between all members of the venture.
Under this scheme, the responsibility of success on the intended training and skills transfer is
delegated to the main contractor, which works as an agent on behalf of the regulator. Of course
this scenario, is not risk free, and many times derives into a deteriorated distortion of the genuinebeneficiaries expected from the intended policy, and through different mechanism only a superficial
inclusion of black participation is actually executed in the contract (Khatletti 2008).
It is of course, particularly difficult for the government to monitor and assess the actual
implementation of this scheme on all contracts and verify that the main contractor is acting in a
well-intended manner. This is worsened by the fact that, the larger company has advantage on the
level of information in the way the contract is being executed, and not in all cases its interests are
in line with the policys objectives, which are based in the theory that the main contractor, acting in
self interest, would look after the higher positive impact in the long run, by investing in the
transferring of skills, knowledge and technology to its subcontractors and partners, and not on a
short narrowed vision, where this transfer is not executed.
In many cases, complex ingenious contractual structures are designed, so that in paper, the
structure of the contract and the unfolding of the responsibilities between the main contractor and
the required sub-contracting firms comply with BEE policies. Nevertheless, what is actually
happening under the table is a set of decisions that guarantee that the well-established firm is in
reality receiving full profits from the agreement and maintains full control of the operation, either by
internal arrangements or by relying on third-parties fully managed or owned by the well-established
8/2/2019 Ivan Diaz(16360613) Economics (R01)
10/14
6
companies. In this way, the small firm will never gain the required expertise or play a significant
role in the development of the project, limiting its responsibilities to peripheral functions, depending
on the technical and operational know how of the main contractor.
3.3 Industry lack of skills
The construction environment in South Africa is not currently booming, but there is still a vast
demand for infrastructure development, the economy has performed in a relatively stable way
during the last few years and there has been a general increasing investment trend. The Achilles
heel of the industry is the shortage of highly skilled labour to proficiently supply these needs.
Unfortunately, the industry has historically faced a huge shortage of specialized skills, which
together with periods of prolonged periods of low industry demand and unattractive wages in the
local sector have also had a major impact, forcing many knowledgeable professionals to leave the
sector in search of better opportunities elsewhere (BOUTEK 2004).
While larger contractors can afford to sponsor professional training for their personnel in exchange
for contractual commitment to their company, the limited number of projects and the high market
concentration, does not facilitate the retention of experienced labor nor does it allow the
opportunity for inexperienced professionals in the smaller firms to achieve the necessary expertise.
Small firms, face the challenge of the high levels of expertise and diverse assortment of skills
required to successfully compete in the local, regional and global markets. Not only do the smaller
players lack this skilled labour but also find it harder to attract it, rendering the firm unable to race
against the big well-established companies, while they lack the qualifications to comply with the
regulatory requirements to tender for contracts in the mainstream market, missing the capability
required to develop and improve on their working skills and accumulate knowledgeable
experience.
The diverse group of professionals required in this sector to supply strategic solutions to the
market needs, renders it as one of the most important employers in the entire industry. This
segment requires consultants capable to transform those requirements into workable and efficient
infrastructures and buildings; demands individuals able to create innovative projects that respect
and give sustainable use of the natural, human, technological and economical resources; prepare
tender proposals and plan their execution; produce conscious risk assessment analysis;
administrate and manage construction activities; develop efficient and sustainable operation and
maintenance plans (BOUTEK 2004), whilst generating value to all stakeholders.
Therefore, a dynamic and diverse group of professionals is a crucial condition to deliver the
required supporting infrastructures of an industry capable to compete and adjust to the rapid
changes and challenges of the local environment and the ever-growing influence of the global
8/2/2019 Ivan Diaz(16360613) Economics (R01)
11/14
7
market, providing sustainable development and economical national growth.
3.4 Sustainable development
Even though, the South African government is not only committed to comply with its sustainable
development goals, but has shown leadership within the region in the attentiveness to align itsimmediate developing needs without compromising those of future generation, as any other
developing country, global issues such as climate change are not yet a priority in the government
agenda, and little or no tangible action has yet materialized on regulations to put a price on carbon
footprint or stimulate the industry to make higher use of renewable resources and improve their
production process.
Developing countries face immediate critical challenges such as unemployment, vast inequity
issues, large poverty levels and high crime rates. For this reason, the challenge for these countries
is to find a progressive and congruent coherence between the internal short-term priorities and the
global long term ones.Regulations influence this context in a complex dynamic way, by inducing a
battle of interests between immediate remediation and the long-term sustainable growth. Moreover
even when policies and international agreements have been established, much of the
implementation and efforts required to put all of this in practice, remains short of achievement and
real tangible results.
Being South Africa, the most industrialized country in the whole continent, it is also the single
largest contributor of green house gases, mainly because of the dependency of its industry on
energy derived from coal burning (OECD 2010). This is a critical competitive handicap, and while
the government searches for incentives to maintain a sustainable growth and attract foreign
investment to the industrial sector, the primary reliance of energy from this unsustainable resource
needs to be evaluated against the impact on the long-term impact.
The construction industry plays and important role in tackling down this issue, since, the energy
required for producing and transporting materials to construction sites, and the energy
consumption during the construction, operation and maintenance of buildings makes up to nearly
half of the total green house emission in a years time. This complex activity consumes vast
quantities of non-renewable resources; produces large volumes of air and water pollution,
generates waste of non-recyclable or costly to recycle material, and high levels of contaminants,
whilst transforming and changing entire ecosystems and human environments.
8/2/2019 Ivan Diaz(16360613) Economics (R01)
12/14
8
4 CONCLUSION
The construction industry plays an unquestionable vital function in the South African economy. It is
the sector responsible for engineering a vast number of complex buildings and interconnected
systems that provide the infrastructure required for the sustainable development of the nation andthe region as a whole. Its activity, greatly impacts the entire ecosystem and the communities it
serves, bringing progress, equity, public services, enhancement in life quality and opportunities for
growth.
There are however, a large number of challenges facing the successful growth and development of
the industry in the country. A great effort from all stakeholders still needs to be undertaken to
properly align all different interests and tackle critical issues such as the environmental impact,
human development, training and education, knowledge and expertise transfer and improvement in
the quality of the services delivered by this sector. The effort entails an integrated holistic approach
to deliver products and services under a long-term sustainable perspective.
On the environmental side, the relatively cheap electricity prices tend to be seen as an element
that subsidizes the lack of efficiency and energy waste, increasing the carbon emission component
since no concrete incentives or penalties exist. As a result, the market shows little interest to seek
innovative solutions aiming to achieve a significant improvement in the construction process and
operation of the buildings. Policies that encourage efforts to decrease the dependency on cheap
coal burning should be reinforced and the exploration process to uncover alternative sources spurt,
given that South Africa is not only a large emitter already, but will eventually lag behind as a
competitive industrial country in the global market.
Measures such as eliminating the energy subsidies for some industrial sectors, introduce carbon
tax and carbon capture mechanisms, amongst others, would not only have long term beneficial
results on the environment and population well being, but will boost innovative initiatives, force
productivity measures and increase industrial development, while opening new business and
market opportunities for a new born industry that circles around these issues, striving to enhance
human skills, economical sustainability, procure for equality and give good use to the environment.
On the other hand, the construction industry, with its centralized outline and strong established
entry barriers, does not allow for competitive growth and does not stimulate investment on
innovation. The regulator should generate incentives for the industry to decrease these barriers to
entry the market and broader the opportunities and boost competitiveness, increase reliance on
new renewable raw construction materials, and fortify a framework in which the revenues created
are fairly distributed and managed in a more responsible way.
Due to the complexity and the extent of these problems at various human and economical
8/2/2019 Ivan Diaz(16360613) Economics (R01)
13/14
9
dimensions, most certainly, the macro-economical policies will have to target the challenges as a
whole, since these are all interconnected issues that interact, counter balance and affect one
another, they must be dealt with taking in consideration both the short and the long term balance.
This will serve to ensure immediate relief to current critical issues while keeping in line with a
broader perspective for sustainable growth and be directed towards employment creation, labour
and environmental standards improvement, private and public interests alignment and create
mechanisms to improve technical and expertise transfer.
8/2/2019 Ivan Diaz(16360613) Economics (R01)
14/14
10
REFERENCE
CSIR (BOUTEK). 2004.A Review of the South African Construction Industry, Part 3: The Built
Environment Professions. March. [Online] Available: http://www.buildnet.co.za/akani/2004/02.html
Accessed: 3 August 2010.
Ferreira, PM. 2008. Global Players in Africa: Is there scope for an EU-China-Africa partnership?
July. [Online] Available: http://www.ieei.pt/files/6PMFerreira.pdfAccessed: 2 August 2010.
Government of the Republic of South Africa. 2010. South Africa 2010,Government preparation.
[Brochure]. Government Communication and Information System (GCIS)
Khatletli, N., Root, D. 2008. Managing pre-contractual and post-contractual opportunism in BEE
delivery in PPPs. [Online] Available: http://www.grif.umontreal.ca/pages/conferencegrif08/25-
Khatleli.pdfAccessed: 4 August 2010.
OECD. 2008. Competition in the construction Industry. December. [Online] Available:
http://www.oecd.org/competition/roundtables Accessed: 3 August 2010.
OECD. 2010. OECD Economic Surveys: South Africa. July. [Online] Available:
http://www.oecd.org/document/21/0,3343,en_2649_33733_45637781_1_1_1_1,00.html Accessed:
2 August 2010.
(*) Books consulted as background and general information not cited, paraphrased or quoted:
Hawkins, P., Lockwood, K. 2001.A strategy for attracting foreign direct investment. September.
[Online] Available: http://www.essa.org.za/download/papers/001.pdfAccessed: 2 August 2010.
Stakeholder Forum. 2010. International Governance for Sustainable Development and Rio+20.
London: 3 Bloomsbury Place.
Semakula, K. 2008. Best practices in promoting investment for development: with special
reference to infrastructure development in Sub-Saharan Africa. February. [Online] Available: http://
www.oecd.org/dataoecd/3/18/40319638.pdfAccessed: 4 August 2010.
Sewpaul, J. 2007. Overview of the Construction Industry South Africa. September. [Online]
Available: www.export.gov/build/groups/public/@eg.../eg_main_020664.pdfAccessed: 3 August
2010.
http://www.buildnet.co.za/akani/2004/02.htmlhttp://www.ieei.pt/files/6PMFerreira.pdfhttp://www.grif.umontreal.ca/pages/conferencegrif08/25-Khatleli.pdfhttp://www.grif.umontreal.ca/pages/conferencegrif08/25-Khatleli.pdfhttp://www.oecd.org/competition/roundtableshttp://www.essa.org.za/download/papers/001.pdfhttp://www.oecd.org/dataoecd/3/18/40319638.pdfhttp://www.export.gov/build/groups/public/@eg.../eg_main_020664.pdfhttp://www.buildnet.co.za/akani/2004/02.htmlhttp://www.ieei.pt/files/6PMFerreira.pdfhttp://www.grif.umontreal.ca/pages/conferencegrif08/25-Khatleli.pdfhttp://www.grif.umontreal.ca/pages/conferencegrif08/25-Khatleli.pdfhttp://www.oecd.org/competition/roundtableshttp://www.essa.org.za/download/papers/001.pdfhttp://www.oecd.org/dataoecd/3/18/40319638.pdfhttp://www.export.gov/build/groups/public/@eg.../eg_main_020664.pdf