Economic Growth on par with Expectations

Consulting Engineers South Africa’s latest Bi-annual Economic and Capacity Survey (BECS) - January to June 2013 just released, indicates conditions in the first six months of 2013 were not as bad as expected, considering the better than expected increase in earnings, alongside a healthy increase in employment. The industry continues to have to adapt to a low growth environment as the outlook for infrastructure spending continues to be hampered by poor economic growth, lower than expected revenue by government, international economic instability and price volatility, and low private sector confidence.

"We shall continue to track the economic activity of the country via this economic and capacity reporting tool for our member's benefit. CESA intends to be the advisor of choice to the three tiers of Government in order to harness and harmonize the Consulting Engineering service for the benefit of quality of service to the nation at large, bearing in mind global standards as set by the International Federation of Consulting Engineering (FIDIC) of whom CESA is a member”, states Lefadi Makibinyane, CESA CEO. “The way that infrastructure projects are planned and packaged requires a concerted effort by Government and the inclusion of Consulting Engineering firms at this initial planning stage need to be emphasized”, he contends. Makibinyane continues by stating that going forward, “CESA shall share the strategy of how to achieve this with Government and SOE's through continuous bilateral meetings”.

Industry Confidence

In spite of this confidence levels improved by 20 percent to a level of 84 (compared to an expected 76), and is expected to be relatively stable in the next 12 months, with a slightly better outlook for the industry in the first six months of 2014. The confidence index increased to an expected level of 94 for June 2014. It just didn’t materialize into the expected earnings. The relationship between confidence levels of consulting engineers and civil contractors deteriorated from 2009 onwards, as consulting engineers seem to remain busy, while work opportunities for civil construction deteriorated, or otherwise put, could not keep up with the pace experienced during the pre-2010 World cup preparation phase. That trend between confidence levels amongst consulting engineers and contractors has however shown some improvement, as contractors are slightly more optimistic. Confidence in the consulting engineering sector generally lags business sentiment. Business sentiment recovered to a level of 50 (neutral) but is unlikely to be sustained or even improve considering the current economic turmoil in terms of the expected negative impact of strike action during the month of August on the economy.

Fee Income

Member firms’ fee income earned accelerated at a faster pace than expected in the first six months of 2013, after slowing down in the last half of 2012 but that real annual fee earnings are lower on the back of higher inflation.  Added to this approximately 9,9percent of fee earnings were outstanding for longer than 90 days, compared to 8, 3% in the December 2012 survey and 24 percent in December 2011. This translates to an estimated R2bn outstanding in fee earnings.

Human Resources

There was a notable increase in employment during the first six months of 2013. Employment increased by 22 percent to an estimated 24,356 as at June 2013 translating into a positive outlook for the recruitment of engineers. The employment of African (Black, Colored and Asian) professional Engineers increased by 14 percent in the first six months compared to the December 2012 survey. The appointment of African unregistered engineers however fell by 8 percent. Trying to conform to BBBEE requirements, means demand for black engineers will continue to put pressure on firms, as there are simply not enough black engineers available to fill those positions.

Industry Equity

Black (including Asian and Colored) equity, including executive directors, non-executive directors, members and partners, increased to 35,5percent from 30, 1 percent and 28, 1 percent in the previous two surveys. This shows real significant progress in terms of industry transformation. Women (including all races) represented 8,3percent of total equity, compared to 7 percent in the June 2012 survey.

Capacity Utilisation

Capacity levels improved in the June 2013 survey to 91percent, after deteriorating to a level of 87 percent in the previous two surveys. 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.

Industry Challenges

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 R1m anticorruption fund in order to take to take legal action against municipalities and private companies that it suspects of having acted illegally in the award or securing of contracts. In July, CESA took steps to lodge its first case with the regional office of the Public Protector which involves a district council. 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.

Service delivery, especially at municipal level remains a critical burning issue. The consulting engineering industry is threatened by incapacitated local and provincial governments. As major clients to the industry, it is important that these institutions 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.

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. 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. Whether this is linked to complaints of “below cost” tendering during

2009, is not certain, but CESA members should be better informed about engaging in below cost tendering.

Lack of attention to maintain 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. 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.

CESA has on numerous occasions shown its support for both the National Development Plan and Vision 2030 of South Africa, which aim to enhance the economy and eradicate unemployment, poverty and inequality, but believes that more work has got to be done at the SIPS level to breakdown these programmes into tangible and costed projects so that a proper capacity towards delivery can be measure in terms of skills and capital resources.

For a full version of the BECS Report please visit https://www.cesa.co.za/node/21