Rejuvenating SA's Economy - Construction industry input

INCLUSIVE SOCIETY INSTITUTE

Rejuvenating South Africa’s Economy – Construction industry input December 2021

Copyright © 2021 Inclusive Society Institute 50 Long Street Cape Town, 8001 South Africa Registration: 235-515 NPO All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Inclusive Society Institute

DISCLAIMER Views expressed in this report do not necessarily represent the views of the Inclusive Society Institute or those of their respective Board or Council members. All records and findings included in this report, originate from a panel discussion on developing a new economic blueprint for South Africa, which took place in October 2021

Author: Mariaan Webb, Creamer Media Writer Edited by: Daryl Swanepoel

Contents Abbreviations & acronyms...........................................................4 Introduction...................................................................................5 Identifying weaknesses...............................................................7 • Construction mafia.....................................................................................................7 • Cumbersome licensing and permitting....................................................................8 • Infrastructure constraints ........................................................................................8 • Competency shortcomings........................................................................................8 • Long project lead times .............................................................................................9 • Poor planning and budgeting......................................................................................9 • Skills deficit...............................................................................................................10 • Subcontracting requirements..................................................................................10 • Tenders and procurement .......................................................................................10 • Weak partnerships ...................................................................................................11

Interventions for fostering growth.......................................... 12 Conclusion.................................................................................. 15 References.................................................................................. 16

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Abbreviations & acronyms BER.................................................................Bureau for Economic Research

DPWI..................................Department of Public Works and Infrastructure

DWS......................................................Department of Water and Sanitation

IDP................................................................... integrated development plans

GCI....................................................................Global Competitiveness Index

ISI............................................................................Inclusive Society Institute

PPP.........................................................................public–private partnership

Safcec......................................South African Civil Engineering Contractors

Stats SA.......................................................................Statistics South Africa

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Introduction

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he construction industry is diverse and is involved in projects ranging from the development of civil infrastructure, such as roads, bridges and ports, to residential and nonresidential buildings, as well as small private projects.

The last decade, and 2020 in particular, has been tough for the industry. Already in deep trouble before the Covid-19 pandemic, the construction industry contracted by 20.30% in 2020, marking the sector’s fourth consecutive year of economic decline (Stats SA, 2021a). Despite some improvement in 2021, construction remains severely affected by the Covid-19 pandemic and weak investor sentiment (Reserve Bank, 2021).

The industry is a key employer, especially for low- and medium-skilled workers, providing jobs to about 1.22-million people. Between March 2020 and March 2021, the industry shed 264 000 jobs (Stats SA, 2021b). Due in the main to a post-Covidlockdown rebound the sector increased employment in the second quarter of 2021, with gain of 143 000 jobs (Stats SA, 2021c).

Government spending has a material impact on the health of the construction industry as it accounts for more than two-thirds of civil revenue and about 40% of nonresidential construction revenue. As a result of weakening project flow and spending by the public sector in recent years, many civil construction companies have turned to foreign contracts to survive, and an unprecedented number of big contractors have gone into business rescue or liquidation. This is largely attributed to a lack of big government contracts, late payment and the shouldering of lossmaking contracts (DPWI, 2021).

The National Infrastructure Plan 2050, a draft of which was released, for comment in August 2021, can act as an economic stimulus for the industry, provided that a credible pipeline of projects is put forward. It is estimated that the cost of delivering infrastructure to meet the country’s infrastructure development needs will be more than R6-trillion between 2016 and 2040.

It is estimated that the finance gap that needs to be closed is about R2.15-trillion

“Government spending has a material impact on the health of the construction industry . . .”

(DPWI, 2021). The private infrastructure investment sector will be called upon to help fund infrastructure, with public–private partnerships (PPPs) expected fill a finance gap of about one-third of the amount that needs to be invested by 2050.

Amendments to Regulation 28 of the Pension Funds Act will assist to mobilise resources for infrastructure. The changes will seek to mobilise a higher proportion of retirement savings for infrastructure investment, as South Africa is currently behind other countries on this indicator (Business Times, 2021).

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Introduction This Inclusive Society Institute (ISI) report is a summary of themes that emerged from virtual discussions, held on October 19 and November 7, 2021, with construction industry participants to gather their views on what the country must do to place it on a path of higher, sustainable, and inclusive growth. The report identifies constraints to economic growth and development, from the construction industry’s perspective, and puts forward suggestions to improve the status quo.

The report is one in a series of dialogues that the ISI has held with different sectors of the economy and forms part of the institute’s economic research project to develop a blueprint for rejuvenating the South African economy.

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Identifying weaknesses Construction mafia The violent disruption of construction sites is one of the biggest threats to economic activity.

A so-called ‘construction mafia’ has been plaguing the industry for some years, with syndicates disrupting projects and causing damage worth billions of rand. These armed groups visit construction sites and demand a share of work. In January 2020, estimated losses owing to the disruption of construction projects amounted to R40.70-billion (IOL, 2021). Criminality is affecting not only the construction industry, but is also weighing on the electricity sector with serious allegations of sabotage of power group Eskom’s infrastructure, as well as in the rail industry with unprecedented theft of cables. Eskom believes the recent collapse of a distribution-line tower at its Lethabo power station, in the Free State, is a “deliberate act of sabotage” (Engineering News, 2021a). The theft of overhead cables and vandalism of freight utility Transnet’s property continues to be on a steep increase. From January to October 2021, Transnet Freight Rail lost more than 1 000 km of copper cable, while an average of 600 theft and vandalism incidents a month were recorded (Engineering News, 2021b). The criminal activity is a serious constraint on the economy and left unaddressed, will curtail South Africa’s growth prospects (BER, 2021).

Construction projects are also disrupted when there is limited community involvement and support. The Mtentu bridge project, in the Eastern Cape, is but one example of a megaproject that has suffered severe delays owing to community protest. The former contractors, a joint venture of Strabag and Aveng, terminated their contract with the South African National Roads Agency Limited in early 2019, stalling the Mtentu project. At the time of writing, a new contractor was yet to be appointed (Engineering News, 2021c).

A concerted effort is needed to ensure proper community engagement and redress to prevent the project disruptions. Investment in local skills transfer and training of local emerging contractors will enable communities to benefit more from infrastructure projects. The South African Forum of Civil Engineering Contractors (Safcec) believes “throwing the book of law at disruptors is not enough, so too must a book of opportunities be handed to them” (Webster, 2021). Safcec argues that thugs must be isolated

“. . . criminal activity is a serious constraint on the economy and left unaddressed, will curtail South Africa’s growth prospects.”

from genuine grievances of communities and community-based entities that feel excluded from participation in local economic activities. Some business forums in the construction sector, whose members were in the past accused of violent disruptions, have transformed themselves and have started to undertake legitimate business activity.

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Identifying weaknesses Cumbersome licensing and permitting The construction sector is highly regulated and requires permits in advance of construction. These processes can be slow and cumbersome, leaving many private projects trapped in an ineffective licensing and permitting system. The World Bank’s 2020 Ease of Doing Business Ranking places South Africa 98 out of 190 countries on regulations pertaining to construction permits and 108 regarding the registering of property. To build a R4-million warehouse in Johannesburg, Gauteng, it will take 20 procedures and 155 days to obtain licences and permits, to complete required notifications and inspections and to obtain utility connections. By comparison, sub-Saharan Africa’s average is 15.10 procedures and 145.40 days to do the same (World Bank, 2020).

Infrastructure constraints South Africa faces serious limitations when it comes to basic infrastructure and services that are required for the successful execution of projects. The electricity supply issues are well documented, with the country having experienced intense periods of loadshedding in recent years. South Africa is also facing a water crisis, in part owing to a lack of skilled water engineers and insufficient infrastructure maintenance and investment. About 56% of the more than 1 150 municipal wastewater treatment works and about 44% of the 962 water treatment works are in a ‘poor’ or ‘critical condition’ and in need of urgent rehabilitation and skilled operators.

About 11% of this infrastructure is completely dysfunctional (DWS, 2019). Road infrastructure is also deteriorating. More than half of the country’s unpaved road network is in ‘poor’ to ‘very poor’ condition, while about one-third of the paved network is in similar condition. The Eastern Cape, Free State, Limpopo, Mpumalanga and the North West, in particular, are struggling with the maintenance of their respective road networks (Frost & Sullivan, 2021).

Competency shortcomings The lack of appropriate skills in strategic positions in government is a concern. Local government, in particular, grapples with low competency levels as municipalities battle to attract, retain and train and employees with the requisite skills leading to a deficit of experienced staff. There is a disparity between metropolitan and rural municipalities and their ability to attract talent.

Each year, billions of rands are spent on wasteful expenditure, highlighting the lack of accountability, weak project management and the high level of vacancies in key positions across municipalities across the country. The Auditor-General’s report for 2020/21, however, paints a bleak picture of the state of local government, with only 27 (11%) of the 257 municipalities receiving clean audits. It also shows that the resourcing of 122 finance units (32%) was

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Identifying weaknesses either ‘concerning’ or ‘requiring intervention’, owing to staff vacancies, inadequate skills or a combination thereof (Maluleke, 2021).

Shortcomings in municipalities have a direct impact on project planning, execution and management. Concerns have been raised about whether municipal employees understand contracting or what contracting methods are used. The private sector should be called upon to assist municipalities in project management and project spend.

Long project lead times The government infrastructure programme lacks urgency and adequate scale. Industry players participating in the ISI discussion argue that, despite pronouncements by government, actual projects are slow to materialise.

Poor planning and budgeting Weak integrated and spatial development planning, misaligned government budgets and weak leadership and management are to blame for project failures. Government often operates in silos, which hampers the effective delivery of infrastructure. For example, an affordable housing development will be delivered on time, but a lack of coordination among government departments means that bulk services upgrades or social infrastructure, such as a school or a clinic, are not delivered at the same time. A development that should have been conducive to growth is relegated to a dormitory suburb.

Municipalities also fall short in project management, despite being required to draft and present annual integrated development plans (IDPs), in which all projects that are planned and ongoing are listed. The failure to properly plan, present and implement IDPs results in failing infrastructure. For example, raw sewerage flowing into freshwater catchment areas or erratic water supply. It is argued that IDPs and other strategic plans fail when the task at hand is not appropriately quantified, resulting in faulty budgeting and a failure to measure and track progress. There is also a mismatch between policy and affordability. In housing for instance, the focus is on densification, but that is not necessarily affordable.

Town planning failures exacerbate problems at municipal level, with buildings being erected on vacant land without consideration of complementary infrastructure.

Political interference in planning and execution of projects, a lack of accountability, as well as corruption further stifle development. Municipalities are hamstrung by a short-term view, and they seldom look past the medium-term expenditure framework.

The focus on this three- to five-year horizon is not conducive for multiyear projects or developments.

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Identifying weaknesses Budget and funding decisions often focus on the capital expenditure for the creation of infrastructure and do not take into account the full life-cycle cost of infrastructure, resulting in poor maintenance planning later on.

Skills deficit South Africa’s skills deficit is a widely reported concern. The country is not only losing engineers and other highly skilled technical people through emigration, but skills transfer and training are not keeping up with requirements. Training of skilled and semiskilled personnel in the construction industry is important to ensure that infrastructure work is of high quality.

Subcontracting requirements Government has introduced a requirement that 30% of public procurement contracts be subcontracted to designated groups to advance transformation in the economy. Where feasible, subcontracting is compulsory for tenders above R30-million (National Treasury, 2017). While the industry considers transformation as imperative, the 30% subcontracting requirement is a contentious issue. There is concern that in a competitive market, adverse cost effects are mainly being borne by main contractors, which is not sustainable in the medium to long term.

The requirements increase the risk for the main contractor and reduce its span of control over the delivery timeframe, budget and quality of work (Massey, 2021).

The payment of subcontractors is also an area of concern. Smaller subcontractors must be paid within 30 days, but often the main contractor is under pressure as payment from the client is delayed. It is important that there be improved synchronisation of such payment cycles.

Tenders and procurement Several issues were raised regarding tenders and a lack of trust between government and the private sector in the tendering process. Government’s inability to correctly determine the cost of infrastructure results in inflated tenders being awarded, or tenders that underestimate the true cost of delivering the infrastructure.

There is frustration regarding the disqualification of bidders, which appears arbitrary and vague amid a lack of transparency in the tender adjudication process. To address these concerns, professionals who specify the bid should be involved in the adjudication process.

The Gauteng Department of Roads and Transport’s open tender system is a model to emulate to restore confidence in public procurement. The open tender process includes public scrutiny of the opening of the tender boxes and imprinting of all documents, appointing external, independent probity auditors to scrutinise every phase of the tender evaluation process, and

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Identifying weaknesses importantly, the public adjudication of the decision on the recommended service provider where bidders, the media and interested members of the public can watch the proceedings.

It also takes too long to award tenders and the ratio of tenders that are awarded is low. Safcec has called out the City of Cape Town for its slow pace in awarding tenders. According to the forum, the City advertised a road rehabilitation project in May 2019 and gave contractors only one month to tender, while it took the city 16 months to assess the applications and appoint six contractors for the work in October 2020 (IOL, 2020).

Further, a lack of trust between the public and private sectors in the tendering process results in more demands for performance bonds. A performance bond protects the client from a contractor’s failure to perform according to contractual terms. In the current circumstances, the low level of trust means that even smaller projects with contract values of under R5-million require performance bonds.

Concern has been raised about the abuse of tender panels, comprising a selection of prequalified providers, who are considered preferred suppliers. Although a tender panel simplifies the procurement process, it may reduce competition and open the process to corruption.

Weak partnerships Industry participants raised concern about partnerships between government and the private sector. There is a view that government does not consult the construction industry and contractors in early infrastructure planning and design. Early contractor involvement will mitigate many risks during the implementation phase of projects and will save government money. PPPs also need to be streamlined.

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Interventions for fostering growth Suggestions to enhance investor confidence Build leadership and management skills

Leadership and management failures are arguably the greatest single stumbling block to effective service delivery and development. It is stated that it is often not the lack of capital that stops service delivery, but the inability by senior officials to activate and manage the process.

- Move away from a public-sector driven economy to a PPP-driven economy, in which the private sector is more involved in driving infrastructure investments. The private sector will fund infrastructure if there is a return on investment and if corruption can be rooted out.

Enhance private-sector involvement

- The private sector must be treated as an equal partner to the public sector to foster real partnerships. Consult contractors and the construction industry early on in a project to save government money by mitigating risks during the implementation phase.

- Embrace PPPs where they deliver better value for money. PPPs will reduce demands on the fiscus and can be used to fill finance gaps for infrastructure development. Streamline PPPs to reduce complexity.

A new way of thinking is required regarding municipalities, particularly district and rural municipalities, where competency is lacking. Some of the suggestions to get municipalities working again are: - Establish a model to allow for the private sector to partner with local government. This will speed up development. The private sector must be involved throughout the entire cycle, from budgeting, financial management, maintenance and supplementing professional skills.

Fix municipalities

- Professionalise local government to maximise its development impact.

Municipalities need to conduct proper planning and improve the management of budgets and cash flow.

- Enforce accountability for qualified audits and take people to task for failures. Equally, promote clean audits and prioritise the eradication of corruption.

- Consider bonus-driven targets that incentivise better performance.

- Simplify management systems. Officials set themselves up for failure because of unwieldy procedures.

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Interventions for fostering growth

Suggestions to enhance investor confidence – continued Local participation and skills transfer

Ensure skills are transferred to local communities surrounding big infrastructure projects. Increased local participation could assist, to some extent, with the problems that the industry faces regarding the so-called construction mafia and the disruption of project sites.

Maintain infrastructure

Abandon the ‘run-to-failure’ approach where maintenance is conducted only when infrastructure fails. Budget for the full life cycle of a project, including operations and maintenance, rather than considering only the cost of planning and construction. A focus on proactive, as opposed to reactive or emergency, maintenance will save costs and prolong the infrastructure’s life span.

- Red tape and bureaucracy are slowing down development. Regulatory timeframes for approvals must be expedited. A suggestion is to establish a council overseeing the approval processes and to deal with any appeals.

For example, should an application fail to be processed in the specified timeframe, the overarching body should determine the reasons for it – whether it be an apathetic official or an issue with bulk services.

Remove bottlenecks to development

- More land must be made available for development. A rapid land release for housing is needed and government has tracts of land that can be used for this purpose.

- Accelerate the planning for bulk services and invest in the provision and maintenance of services, such as electrical installations, water reservoirs and distribution networks, sewerage treatment works and roads.

Dedicated spending is needed to get maximum delivery traction.

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Interventions for fostering growth

Rework the tender process

Sharpen focus on sustainable developments

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The tender process is cumbersome, expensive and an inhibitor for development. While the tender system should not be done away with, there is a need for government tenders to be more specific, streamlined and simplified. Tender submissions tend to contain a lot of duplicated information, which adds time and costs to the process.

Bids out for tender must be awarded timeously. Industry participants are concerned that too many government tenders are issued for purely speculative or budgeting reasons with no intention or ability to follow through.

A greater emphasis must be placed on planning and building sustainable developments – cities that are planned with job opportunities in mind, with fit-for-purpose infrastructure and that are built with materials that have sustainability in mind.

Conclusion The discussions with the construction industry have highlighted that South Africa must move away from a public-sector driven economy to one in which PPPs play a more predominant role.

Government must acknowledge that it alone cannot create the jobs that are required to place the economy on a path of faster economic growth. Instead, a conducive environment must be created for the private sector to flourish and to attract the investment that is required.

There is also a unanimous view that failing municipalities, often run by staff and managers who do not have the required skills set or who lack ethical leadership, must be fixed urgently to unleash a new wave of development. To achieve this vision, the private sector should be roped-in to partner with municipalities to better leverage private-sector expertise, capacity and experience. The restoration of working municipalities is key to a working and growing economy.

Overall, process must be kept simple and transparent. This must include keeping tender and approval procedures simple, and streamlining PPPs to maximise efficiency and remove bottlenecks to development.

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Engineering News. 2021c. President urges communities to support N2 toll road project, September 23, 2021. [Online]. Available at: https://www.engineeringnews.co.za/article/ president-urges-communities-to-support-n2-toll-road-project-2021-09-23/rep_id:4136 [accessed November 27, 2021].

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November 22, 2020. [Online]. Available at: https://www.iol.co.za/capeargus/news/city-of-capetown-slammed-by-civil-engineers-for-slow-pace-of-awarding-tenders-efab7ea5-4f48-4328-a27c48cf0491697f [accessed November 27, 2021].

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Massey, I. 2021. Opinion: South African construction contract participation requirements appear to be out of touch with reality, October 28, 2021. [Online]. Available at https://www. engineeringnews.co.za/article/opinion-sa-construction-contract-participation-requirementsappear-to-be-out-of-touch-with-reality-2021-10-28/rep_id:4136 [accessed November 27, 2021].

National Treasury. 2017. Preferential Procurement Policy Framework Act, 2000: Preferential Procurement Regulations, January 20, 2017. [Online]. Available at: http://www.thedtic.gov.za/ wp-content/uploads/PPPFA_Regulation.pdf [accessed November 27, 2021].

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This report has been published by the Inclusive Society Institute The Inclusive Society Institute (ISI) is an autonomous and independent institution that functions separately from any other entity. It is founded for the purpose of supporting and further deepening multi-party democracy.

The ISI’s work is motivated by its desire to achieve nonracialism, nonsexism, social justice and cohesion, economic development and equality in South Africa, through a value system that embodies the social and national democratic principles associated with a developmental State. It recognises that a well-functioning democracy requires well-functioning political formations that are suitably equipped and capacitated. It further acknowledges that South Africa is inextricably linked to the ever transforming and interdependent global world, which necessitates international and multilateral cooperation. As such, the ISI also seeks to achieve its ideals at a global level through cooperation with like-minded parties and organs of civil society who share its basic values. www.inclusivesociety.org.za