By Werner Jerling Pr Eng, Pr CPM SAICE Fellow
Recent media coverage of appeals by SAFCEC, CESA and others to government to intervene and save our industry has caught the attention of many a Civil Engineer. We work and ply our trade in a sensitive ecosystem that is a jewel in the crown of South Africa. We are in fact one of the few countries in Africa that still has a fully functioning and self-sufficient construction industry. But we are in trouble.
THE CONSTRUCTION INDUSTRY ECOSYSTEM
The construction industry ecosystem is like a biological ecosystem – a very sensitive order of interrelated and interdependent entities. Damage or disrupt one, and the whole ecosystem suffers. In many cases innocuous meddling also causes unintended consequences. So, this ecosystem consists of our clients or employers, professional service providers, legislated bodies, professions, voluntary organisations, employer bodies, trade unions, construction companies, specialist sub-contractors, sub-contractors, plant and equipment suppliers, general service providers, material suppliers, and then all the people who, as individuals, are dependent on the ecosystem for their daily bread. For the purpose of this discussion the terms construction industry and construction ecosystem are used interchangeably.
SIGNS OF DISTRESS IN THE ECOSYSTEM
Sir David Attenborough is currently narrating a remake of a nature programme compiled 20 years ago and is visually showing what our activities have done to our planet in the past 20 years! We all knew it was going on, but we let it happen. Likewise, we all observed the decline in our industry, and sat by as spectators. There are those who say all ecosystems must deal with cyclical impacts, as this is part of nature. The question we face now, however, is the magnitude of the impact, potentially more severe than natural cyclical movements. We are now seeing our industry stumble. Some of the major construction companies are on their knees and, with them, a multitude of others in the construction ecosystem who are dependent on them. All the while, the real impact has been that our projects are not being rolled out efficiently and effectively, and projects overrun on time and cost, or are not completed at all. These are the signs of a faltering construction ecosystem.
ABNORMAL ECOSYSTEM IMPACTS
There are several events and actions that have damaged the industry more than the normal cyclical impacts which any business must expect. Some of these are:
General economic conditions
The general economic conditions of the last few years have affected all industries in South Africa. The construction industry was particularly hard hit by government spending grinding to a halt. As an example one could mention the SANRAL ‘drought’ and the cancelling of a number of Transnet and PRASA programmes. The mining sector, on which the industry has also relied, stopped investing, driven by resource prices initially, and later by policy uncertainty and the mining charter process. One simply has to look at the dismal statistics of prospecting licences issued, which usually indicate long-term investment planning, to appreciate the dearth of economic activity.
Fiscal pressure led to budget cuts, the slow-down in fixed capital formation and lack of business confidence, all of which have impacted public and private investment, leading to order book constraints for everyone. The investment and capital markets are running very shy of the industry. Investment in listed entities is, at best, lacklustre. Returns in the industry are poor, to say the least, and the prospective investor looks for better returns elsewhere. This is fuelled further by the poor performance and business failure risk of construction companies. Capital is thus expensive and elusive for businesses who need capital to bridge poor or no payments for work done, who need to invest in capital equipment, and who need to meet strict bonding requirements by their clients. The ability of a strong local construction industry to re-invest into the economy in the form of public-private-partnerships (PPPs) or similar ventures could greatly boost the economy. This, however, is highly unlikely and not something one can rely on in the immediate future, given the terrible erosion in value of the large, industry entities.
Red tape and a highly regulated environment
The construction ecosystem is burdened by significant red tape and a complex regulatory environment. Ask any business owner or CEO how much time is devoted to these matters. Doing business in the current ecosystem is not simple. It is in fact very demanding. Simply mention the words water use licence, mining permit, construction permit, etc, and a shudder goes through project delivery teams! The impression is created that finding reasons not to implement projects gets more attention than finding reasons and ways to do so. Many of these well-meant regulatory measures do not assist our industry. Delayed project approvals have scuttled projects or caused significant cost overruns.
The impact of industry bodies
Lack of tangible support by regulated bodies set up to nurture the industry has been telling, to the point where businesses see this as yet another ‘tax’ and burden to do business. This should not be the case. These bodies should assist to protect and grow our ecosystem. They are the game rangers supposed to help us! This statement seems somewhat negative, but each of these bodies should honestly do some introspection and ask what they have really done to make our ecosystem function better. What happened to the artisans we are all waiting for? Do we really see contractors developed, or is the business failure rate simply too high? Why do we have so many CIDB Level 1 contractors? Should there actually be such a category of contractor, or should there rather be a contractor-in-training category? There was hope in the publishing of prompt payment regulations. This, however, seems to have melted away quietly.
The intended impact of the Presidential Infrastructure Coordinating Committee is not felt by the participants in the industry to the degree that it should. How many of us are impacted by this, and what contributions are we asked and allowed to make? Employer bodies and voluntary associations are faced with significant challenges as they battle to garner support from members for grassroots participation, leadership and energy to get things done. Our professions feel the pinch as well, as they rely on volunteers in many cases. The importance of industry experience and knowledge must be reflected on the boards of these entities to enable policy decisions to bear direct fruit. Everyone seems to be too busy surviving to give time to the future.
Project procurement and implementation policy
Procurement regulations are complex and onerous in a justified effort to curb abuse and corruption. This complicates procurement to such an extent that many authorities are unable to spend their capital budgets and even return unspent funds to the fiscus. Statistics indicate more and more smaller projects being let. This may be caused by simple budget constraints. We can, however, not ignore public statements and conscious actions by government to fragment the industry. Several political leaders have been vocal on this matter. This has had the unintended consequence that the ecosystem is damaged. There are incidences where fragmentation policies have led to procurement decisions to re-package projects. An example may be a water treatment plant being split into six packages, all awarded to different design and construction teams. None of these packages may be awarded to the same team. The result is that the project does not come to a synchronised completion, with a myriad interface management issues. The settlement tanks could lie empty for years as they wait, for example, for the raw water supply package to overcome its challenges and be completed to produce water for testing and commissioning. The real disaster lies in the whole plant, with its associated investment, being unable to yield a productive benefit to the citizens and the authority.
Risk shedding and contractual complexity in contracts
Trends in contract conditions and claims resolution policies in the employer bodies are becoming more adversarial. Special contract conditions are introduced shifting risks onto the contracting supply chain where it simply cannot be borne effectively. The most significant of these is where contract conditions attempt to make community relations, expectation management, harmony and peace part of the contractor’s responsibilities. Force majeure clauses in this respect are coming under scrutiny by the courts as we speak. Public sector projects with outstanding disputes quickly evolve into arbitration or litigation. It is not uncommon to hear an official, who may be able to resolve a dispute, state, “Let us rather get someone else to decide. I may agree with you, but please realise, the livelihood of my children and my pension is at stake here.” This places the parties on a long and adversarial journey that quickly moves beyond the control of the parties responsible to solve the problem. The associated financial impact on the contractor could be crippling, as cash remains outside the company coffers.
Hooligans and thugs
A lot has recently been written on the impact of the so-called ‘construction mafia’. These are thugs who extort ‘membership fees’ from desperate local contractors who then join an economic forum that promises jobs, or total exclusion should a party not join. These thugs then skim the second layer of cream where they threaten the main contractor on a project with project closure and death or bodily harm to site management if work is not allocated to their members with a lucrative cut to the forum. This sounds a lot like Al Capone and his mafia buddies visiting the corner butchery every month for protection money. In extreme cases site agents are approached by these thugs, an AK47 bullet is placed on the desk, and the site agent is told that the bullet costs R17, which “is the cost of your life …” The above may appear alarming and scary, and I acknowledge that it represents the extreme case of a variety of thuggery levels. It does, however, illustrate the exposure a site team faces. There are indeed cases where contractors have lost their lives to this type of thuggery. When projects are halted and the whole process stands, contractors need to claim for delays, and projects invariably turn sour. Dedicated engineers who devote themselves to constructing much needed infrastructure then seriously start considering those approaches from Australia, Canada and New Zealand where the market is vibrant and where we engineers are able to do what we do best without expending energy on issues that have no bearing on the project mission. Construction companies have a responsibility to look after their employees, but the statistics show an outflow of the very people who need to drive the projects of the future. What we need are clients able to and prepared to stand up to thugs, supported by the law enforcement authorities. Politically expedient promises by politicians and officials keen to please, create pre-construction expectations that can simply not be met by the project. The matter of localisation and local contractor involvement is a critical imperative and is not disputed. The way we achieve this, however, is what needs debate to find a realistic, practical solution. Here client and regulatory bodies are silent or simply ignoring the essence of the problem.
Job creation and skills development
In an ecosystem, energy is drawn from the environment. Job creation, and the training and education of people in our ecosystem, is that energy. Our ecosystem has the potential to be the second largest provider of jobs, second only to the agricultural sector. It is thus horrifying to see that, since 2014, our industry has shed 35% of all jobs in our sector, thereby losing critical skills at all levels. Our contribution to the larger South Africa is particularly important in that we are able to create jobs for a range of people from the poorest and least educated to those at the highest education level.
One cannot fail to consider what the levies we all pay towards the CETA have yielded. Regardless of one’s opinion or sentiments on the matter, we as an industry are not seeing the product of the investment we were supposed to have made. Artisans and tradespeople are needed in large numbers. The announcement, in the President’s State of the Nation Address earlier this year, of the intention to focus on education through technical schools was encouraging. Let us hope this becomes a reality.
Collusion and corruption
There is no doubt that these two issues have caused irreparable harm to the industry’s reputation and financial health. Whereas one cannot condone the anti-competitive behaviour in our industry, one must ask if the fines meted out were just one too harsh at a time when the earnings in our industry could simply not afford the burden. Was this one of the straws breaking the back of some of the listed major construction companies? It is easy to calculate the turnover required to cover the payment of the fines from the profitability reported by the listed entities over the past number of years. That turnover was simply not available in the industry, and profitability has suffered as cash drained out of the businesses. Corruption is on everyone’s minds and we are all astounded at the revelations and the quantum thereof, and the extent of the damage suffered. However, whereas corruption is a cancer we cannot allow, one must exercise caution in blaming corruption for all project failures in South Africa. Corruption may indeed have had a terrible impact, but we cannot ignore the impact of poor engineering decisions, designs and project management practices, as well as low productivity.
The fallacy of the cheapest price
Projects are feeling the harsh impact of construction designs produced by the cheapest tendering professional service provider. These entities have no choice but to simply cut man hours. Contractors bid on numerous projects, and therefore see many designs for projects and observe the varying quality of design work being produced. Over-design for expediency, to reduce man hours and protect a practice insurance risk, is commonplace. In this the people who we serve, the public out there, may be paying much more than they should. By their own admission some of the construction companies now filing for business rescue have been guilty of under-pricing bids “to keep the company going”. The impact of this damaging practice is being felt much further now, to the point of harming those who priced correctly. One must therefore ask if government and other construction clients acted correctly in accepting underpriced bids. In the long run this practice hurts the whole construction economy. More circumspection, experience and investigation are required in the awarding of tenders. This goes beyond mere compliance matters, but cuts to the core of the ability to execute and complete contracts. The quest for the best price is not necessarily for the cheapest price. Nobody, for example, goes for the cheapest medical or legal advice.
Sir David Attenborough, in many of his nature programmes points out how ecosystems have an amazing capacity to bounce back and recover, given the correct intervention, protection and chance to do so. The question arises if the same may be true for the construction ecosystem? It is the contention of the writer that we are indeed an ecosystem that can recover. It is, however, now critically important that we acknowledge our interdependence and that we sit around the table in the interests of our country. The time has come for honest and open discussion, putting dreams and differences aside and getting down to the business of saving our ecosystem.
So where can we start?
- The first is to acknowledge that there is indeed a problem and that this is not merely a cyclical phenomenon. We need to face the reality that our domestic construction capability may cease to exist. We should ask ourselves whether we all agree that this is bad for South Africa.
- Secondly, the industry bodies, throughout our ecosystem, should put their collective heads together and get the debate out into the open in their various forums, conferences and meetings. These bodies include state oversight and implementation bodies, institutions of higher learning, organised labour, employers’ organisations, etc. Alignment and common cause amongst these bodies will allow leadership and wisdom to flourish.
- The ‘game rangers’ who are supposed to protect our construction ecosystem must be seen and heard. In our ecosystem these are bodies such as the CIDB, CETA, PICC, Department of Public Works, Ministry of Economic Development, DTI, and the CBE with ECSA and the SACPCMP. Their participation, at the highest levels, meeting with, listening to and supporting leaders in our industry, is critical.
- The words indaba, conference or workshop conjure up visions of talk shops and cosy chatting, with no real action emanating therefrom. We as the industry, however, have no choice but to place these issues in the open and rally every one around the issues we face. Such indabas are therefore important as part of the process.
- As Civil Engineers we all play an important leadership role in this ecosystem and we do not have the luxury to stand by idly. We must get involved in the activities of SAICE and similar bodies to put the solutions into action and devote the required energy to bring about change, instead of waiting for someone else to do so. We have a noble quest. Not one where we all run for cover and wait for someone else to do the work which brings no return to the own pocket. We cannot afford to put experience, knowledge and energy on the altar of political expediency where we praise the emperor’s new clothes, as in the popular tale by Hans Christian Andersen.
*This article first appeared in the May 2019 edition of SAICE Civil Engineering magazine.