CESA – Economic Growth better than Expected

Consulting Engineers South Africa’s latest Bi-annual Economic and Capacity Survey (BECS) –July to December 2013 just released, indicates conditions during 2013 continued to surprise firms. Following on a “better than expected” first six months of 2013 the second half of 2013 also surprised on the upside. The confidence index for the last six months was revised from an expected level of 85.0 to 98.1, as conditions were better than expected. The more upbeat sentiment is maintained for the next 12 months, averaging 98.3 for the first six months of 2014 and 98.5 for the last six months of 2014. The current level is at its best since 2008/09.

Real gross fixed capital formation increased by 4, 7 percent y-y in 2013, from 4, 4 percent in 2012. This is higher than original forecasts which were estimated at 3, 2 percent. A modest improvement in investment by private business enterprises was offset by lower growth in public corporations and general government. Investment growth is expected to continue to surpass GDP growth, projected to increase by between 4 and 5 percent over the next two years. Gross fixed capital formation (GFCF) as a percentage of GDP increased to an average of 22,9 percent in 2013, from 22,3 percent in 2012, mainly due to an improvement in investment of machinery and equipment, which increased by 10 percent in 2013 and transport equipment which increased by 2,0 percent. The NDP has set a target of 30 percent contribution of GFCF to GDP by 2030.

Fee Income
Fee earnings accelerated at a faster than expected pace, up 9 percent in the last six months of 2013, compared to earnings in the first six months of 2013, against an expected “flat growth”, or “no change” scenario. Fee income increased to R22, 3 billion, annualised, current prices as at December 2013.

Following the 9 percent nominal increase in earnings, real growth increased by 10, 3 percent compared to the same period in 2013. This is the strongest real growth in earnings since the 44 percent increase reported in the last six months of 2008. Firms further expect growth in earnings to accelerate by 11 percent in the first six months of 2014, compared to the last six months of 2013, which would then translate into a 14 percent increase (allowing for a 6% inflationary cost increase) compared to the first six months of 2013.

A concern is that about 23 percent of fee earnings were outstanding for longer than 90 days, including income outstanding from foreign clients, compared to 9, 9 percent in the June 2013 survey and 8, 3 percent in the December 2012. This translates to an estimated R5billion outstanding in fee earnings.

Industry Equity
Compared to the same period in 2012, employment in general was up by 26 percent, which is an increase of 5 122 people. The appointment of Black executive staff (including Black, Asian and Colored), measured by the contribution of black executive directors, non-executive directors, members and partners as a percentage of total executive staff, increased to 35,8 percent from 35,5 percent, 30,1 percent and 28,1 percent in the previous three surveys. This shows real significant progress in terms of industry transformation. The employment of African (Black, Colored and Asian) professional engineers fell by 1,6 percent in December 2013 vs. the first six months of 2013, but as compared to the same period in 2012, increased by 21 percent.

Capacity Utilisation
Capacity levels stabilised at 91 percent over the last two surveys, after deteriorating to a level of 87 percent in 2012. A level of 91 percent is so far the highest level reported by participating firms since the December 2008 survey when it was at 95 percent. Fewer firms expect to further increase capacity, 15 percent compared to 27 percent in the previous survey.

Industry Challenges
Unrealistic tendering fees remain a concern for members, while the extended time it takes in which to finalise a proposal is affecting profitability in the industry. In addition to this the quality of technical personnel is argued by some firms to have deteriorated, putting greater risk on the built environment sector.

Fraud and corruption is affecting the ethos of our society, with a lot of talk and little action accompanying the growing evidence of corruption. CESA established an R1million anticorruption fund in order to pro-actively prevent tendering irregularities experienced by its members. Here the members of CESA are required to raise any observed tender irregularities, especially at the tender specifications as advertised, to CESA who immediately contacts the concerned client to influence withdrawal of the tender, rectify the irregularity and re-advertise. It is CESA’s CEO, Lefadi Makibinyane’s strong belief that “prevention is better than cure”. CESA as a trusted advisor understands that it also has to be a trusted partner to its clients, with clear recognition that infrastructure delivery cannot be further delayed by issues of tender irregularities that are fought at courts on protracted litigation suites. CESA is also engaging with National Treasury to include the concept of an “integrity” pact into the Public Finance Management Act and the Municipal Finance Management Act.

Unlocking greater private sector participation is seen as a critical element to fast track delivery which will support engineering fees and as such engineering development in the industry. Private sector participation in this context refers to involvement on a more technical level (and not as a client), to improve municipal capacity and efficiency.

Service delivery, especially at municipal level remains a critical burning issue. The consulting engineering industry is threatened by incapacitated local and provincial governments. Public sector and these two tiers of Government in particular, as major clients to the consulting engineering industry, are called upon to become more effective, more proactive in identifying needs and priorities and more efficient in project implementation and management. Pravin Gordhan made it very clear that under spending of infrastructure budgets is a serious concern for the industry, where only R177bn of the R266bn was spent during 2010/11.

The involvement of non-CESA members in government tenders and procurement continues to threaten the standard and performance of the industry. Non-CESA members do not seem to comply with the same standards and principles as those firms that are members of CESA. Firms from across South African borders are tendering at rates that are not competitive for local firms. Complaints have been received of some of these firms not producing proper drawings and not attending site visits. Clients need to be more vigilant to request a high standard in-line with what CESA advocates as a self-regulator of the Consulting Engineering services, to ensure that proper procurement processes are followed to eliminate the risk of awarding contracts to “unscrupulous” firms. While these occurrences may be limited to smaller rural areas, it remains an unacceptable practice. Clients can be assured of the quality of service through the appointment of Consulting Engineering firms that are members of CESA because it promotes the highest level of professional conduct, adherence to highest quality management standard, ethical conduct and management integrity amongst its members, ensuring that the client receives the best solution measured against cost and quality.

Lack of attention to the maintenance of infrastructure poses a serious problem for the industry. Not only is it much more costly to build new infrastructure, but dilapidated infrastructure hampers economic growth potential. The cost of resurfacing a road after seven years at current prices, is estimated at R175 000 per kilometer, compared to R3 million per kilometer to rebuild, less than 6% of the construction price. In many cases, infrastructure is left to deteriorate to such a state, that maintenance becomes almost impossible.

A further challenge to the industry is to find a way to standardize the procurement procedures applied by the different government departments. Procurement procedures should be standard for the country, or at least for the specific tier of government. “We are however encouraged by the good work by the cidb in formulating the procurement standards within the construction industry which will also cover the work of Built Environment Professionals”, concludes Makibinyane.