As SA’s economy struggles to recover from Covid-19, the government, like many of its global peers, is looking to infrastructure and construction to help deliver economic recovery, improve services, as well as put a dent in the unemployment rate. Business Day caught up with economist and economic adviser to the Optimum Investment Group, Dr Roelof Botha, whose experience spans more than four decades, to get a sense of the state of play in the construction industry and what SA can expect in 2022.
The construction index you compile on behalf of Afrimat indicates that the industry’s recovery is outperforming other parts of SA’s economy, but isn’t quite at pre-pandemic levels. How far has it come? And when do you think it will get there?
The recovery of the index by 67% since the low that was recorded in the second quarter of 2020 is welcome, but masks a long-term declining trend induced by a toxic combination of relatively high interest rates, fiscal constraints, over-regulation of economic activity, dysfunctional municipalities, state capture and corruption. These constraints have conspired to act as a disincentive for capital formation, especially infrastructure. Until such time as government addresses these issues and starts to remove the numerous obstacles faced by businesses in the building industry at large, further recovery will remain muted.
Covid-19 can’t have been good for mall construction, but has definitely boosted home improvement. What trends have we seen during the pandemic, which ones are petering out, and which ones do you think are set to continue in 2022?
The development of regional malls located in relative close proximity to urban areas will in all likelihood continue to attract attention from developers, as will as the imminent transformation of some office buildings into residential units. The share of alterations and additions in the total value of buildings completed has witnessed a structural improvement from an average of 15% in 2019 to a new quarterly record high of almost 29% during the third quarter of 2021. This is likely to continue, especially in the so-called Zoom towns in many rural areas, mostly in the Western Cape.
The government has made clear that infrastructure is a priority, gazetting 62 priority projects in 2020, and recently announcing that 55, worth almost R600bn, have been added to the pipeline. How fast is the government really moving on this, and how easily do you think they’ll be able to plug their funding gap?
The infrastructure pipeline is certainly impressive and will probably top the R1-trillion mark during 2022, but progress has been woefully slow, mainly as a result of significant bureaucratic delays, which have been exacerbated by the Covid pandemic and lockdown regulations. Government needs to act with more urgency, especially in providing the office of Infrastructure SA with more powers to streamline the necessary regulatory procedures, even if this means superseding some of the functions of the relevant government agencies (at all levels). Once the level of activity in construction returns to pre-state capture levels, the funding gap will not be a problem.
SA also had a local government election in 2021, which comes with the usual promises. Now that South Africans have elected officials, are there any signs that municipalities are more interested in dealing with infrastructure issues overall, or is it too soon to tell?
Judging by the speed with which visible improvements of service delivery have occurred in the uMngeni Municipality in KwaZulu-Natal and the stated commitment to much improved service delivery by several coalition-led municipalities around the country, there is indeed hope that some local authorities will start assisting the development of new infrastructure and also adequately maintain existing infrastructure.
SA has two major socioeconomic problems to address: transformation and more jobs. What is the government doing right in tackling these issues?
Transformation is essentially an ideological objective that should be approached in an evolutionary manner that does not harm the output potential of the economy. Unfortunately, it has become a nefarious concept in SA, due to being associated with nepotism and corruption in the tangled web of state capture that occurred during the Zuma administration. In order to tackle the twin problems of income inequality and poverty, government should single out one over-arching policy objective, namely job creation. To succeed, it will have to work in very close co-operation with the private sector, both in terms of removing obstacles to business expansion and providing incentives for new capital formation. Due to its high level of labour intensity and its indispensable role in the building of infrastructure, construction should be prioritised, with a sector master plan at the top of the agenda.
What is the government doing right, generally?
The identification of 117 priority infrastructure projects valued at more than R800bn, progress with arresting and prosecuting many suspected perpetrators of corruption, and a firm commitment to a market-friendly approach towards macroeconomic policy by the Ramaphosa administration are helping to lay a solid foundation for enhanced capital formation in the economy. The construction sector is bound to thrive from imminent further progress with this paradigm shift in policy direction.
Cement makers recently got a boost from the government’s decision to only allow local cement in state projects. The DA-led Western Cape has challenged this, citing price concerns and a lack of socioeconomic assessment. What are your thoughts on the costs and benefits of this particular localisation push?
I believe that government is on the right track. Several countries that are exporting cement to SA have a reputation for being parsimonious with the truth, which, in this case, constitutes accurate data on the cost of production, especially in the area of various government subsidies. In such cases, embargoes on imports are entirely warranted and will ultimately lead to lower domestic prices via lower overhead costs per unit.
The JSE’s construction index is not what it once was. Raubex has a record order book at the moment, but Basil Read and Group Five are now gone, Stefanutti Stocks is struggling, and Aveng is now only interested in mining services in SA. What happened? Any reason to expect SA will have more public-traded construction counters in the future?
A decade of deteriorating public sector governance, over-regulation and decaying infrastructure, especially in energy and roads, has not fostered an environment that is conducive for an expansion of construction sector IPOs [initial public offerings] on the JSE — a fate that has befallen several other sectors as well. Fortunately, many of the skills that were present in the JSE’s erstwhile burgeoning construction and materials sector have found their way into smaller, privately owned companies. To some extent, this trend is evident in the recent recovery of the Afrimat Construction Index.
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