Southern boom

Sub-Saharan Africa's economy is expected to grow +6.3% in 2007, according to the International Monetary Fund, which also claims that this will be the fastest pace in more than three decades. The growing economies of countries such as oil-rich Angola, Mozambique, Botswana and the Republic of South Africa are expected to play key roles in achieving the anticipated gains.

According to the South African Federation for Civil Engineering Contractors (SAFCEC), the South African economy grew +5% year-on-year in real terms during 2005 and growth in 2006 will probably be marginally lower. Nonetheless, the federation states that “fixed investment in construction will increase in 2006 and will be above the +10% annual increase reached during 2005”.

SAFCEC's second quarter report on the state of the civil engineering industry, said that “the industry is particularly encouraged by the emphasis put on infrastructure delivery as manifested by the involvement of the Deputy President Phumzile Mlambo-Ngcuka in various initiatives”. These include Accelerated and Shared Growth Initiative for South Africa (ASGISA) and the Joint Initiative on Priority Skills Acquisition (JIPSA).

Football fever

Football is partly behind this optimism for the future - 2010 will mark a first for Africa when the next Football World Cup will be staged in South Africa. With an economy that has been growing steadily over a number of years, and the South African Government's increased focus on the development of infrastructure, the construction industry is well positioned to benefit from the many opportunities.

Although World Cup projects comprise only a portion of the total construction projects coming on stream in South Africa, they will probably receive special attention. Successful hosting of 'The Cup' is often seen as a prerequisite for sustained economic growth in the future.

Stadium construction comprises a mixture of refurbishment of existing facilities and development of new buildings. In terms of refurbishment, the Loftus and Ellis Park stadiums in Pretoria and Johannesburg, respectively, will be refurbished. Soccer City, also known as the FNB stadium in Soweto, Johannesburg will be expanded as the host venue of the 2010 final.

Other World Cup host cities include Rustenburg, Bloemfontein, Mbombela (Nelspruit), the Nelson Mandela Metro (Port Elizabeth), Polokwane. In Durban the Kings Park Soccer Stadium will be completely rebuilt, as will the Green Point Stadium in Cape Town. Design work for most of the World Cup stadiums is now complete and tenders are currently being issued, so actual building should commence early in 2007.

Power plans

Another sector that will see significant development is the power industry - rapid economic expansion means that South Africa is fast running out of electricity and new power stations are being planned.

In this regard as many as 15 contracts will be awarded over the next 24 months for specialist services in the construction of the ZAR 8.9 billion (US$ 1.17 billion) Braamhoek pumped storage scheme in KwaZulu-Natal. The major contracts include dam construction, underground works, roads and supporting infrastructure.

In addition state-owned electricity enterprise, Eskom, also plans to develop three coal-fired power stations in the Waterberg region. The first coal station on the agenda is a 4200 MW facility to be built near Lephalale. The project value is expected to be close to ZAR 26 billion (US$ 3.4 billion).

Overseas interest

In the late 1990s and early part of this decade many South African contractors ventured across the border and undertook construction projects in the rest of Africa. However with the increase in work locally, as well as some very unprofitable experiences, most South African contractors have returned home. Nonetheless, increasing numbers of international construction companies are starting to take a keen interest in the many project opportunities around the southern tip of Africa.

France's Bouguyes is involved in the Gautrain project - a high-speed rail network between OR Tambo International Airport (formerly known as Johannesburg International Airport), Sandton, the central business district and on to the neighbouring city of Pretoria.

The main contractor and operator for the ZAR 20 billion (US$ 2.6 billion) public private partnership project is the Bombela Consortium, a joint venture of Bouygues, Bombardier and South Africa's Murray & Roberts; and black economic empowerment group Strategic Partners Group (SPG). One of the biggest challenges facing the project is the construction programme, which has been reduced from 48 to 45 months because of approval delays. The scheme is planned for completion in June 2010.

Various Chinese contractors have also successfully secured tenders, the most noteworthy being the ZAR 2.5 billion (US$ 329 million) Vaal River Eastern Subsystem Augmentation Project (VRESAP). A joint venture between the Chinese Overseas Engineering Company (COVEC) and Mathe Construction - a South Africa-based fully black-owned construction company, was awarded one of the first contracts on the VRESAP. Under the ZAR 425 million (US$ 55.8 million) the joint venture will carry out civil works and the supply and install mechanical and electrical equipment.

The VRESAP scheme involves the transfer of water from the Vaal Dam south of Johannesburg to the industrial town of Secunda in the neighbouring province of Mpumalanga. The water transfer scheme will move 160 million m³ of water between the Vaal Dam and Knoppiesfontein near Secunda every year.

In addition local construction companies such as Murray & Roberts and Aveng have seen a significant increase in foreign shareholding. Judged by market perceptions, South Africa's focus on infrastructure development provides a sound investment opportunity.

Construction boom

The South African construction 'boom' is best measured by the +40% increase in fee income reported by the South African Association of Consulting Engineers (SAACE). According to its bi-annual Management Information Survey (MIS) fee income among its members increased by an average of +40% in the period January - June 2006 when compared to the same period in the previous year.

SAACE claims that the quarterly growth rate in the South African construction sector has surpassed overall economic performance since 2001. Consequently the contribution of the construction sector to GDP (at market prices) has started to improve from the record lows experienced during 2002.

Graham Pirie CEO of SAACE told iC that construction's contribution to GDP is currently at the best level since 1991, after having increased from 5.2% of GDP in the first quarter of 2002 to 6.7% in same period of 2006. The contribution of the construction industry is likely to increase to between 7.5 and 8% in the next three years, supported by higher investment by government, corporations and the non-residential sector.

Skills and equipment

However, the positive outlook is somewhat dampened by the significant skills crisis which is currently being experienced in South Africa. Although there is a significant focus in South Africa on employment equity by creating opportunities for people who where disadvantaged under the country's previous apartheid dispensation, the skills gap is simply too big to be overcome in a short timeframe. To resolve the issue, both the private sector and the government have started to look for skills abroad.

SAACE's survey also found that between January and June this year, the average profit margin among consulting engineering firms reached 18%. However, the need for engineering staff was reaching a critical stage, with 92% of the firms looking for more engineers and 80% looking to recruit technicians. More than 90% of the firms reported difficulties in finding both engineers and technicians.

Perhaps the current construction climate in South Africa can best be described as the quiet before the storm. This is confirmed by the high turnover of work in the offices of consulting engineers. These projects have not yet reached tender and construction stage, but clearly a lot of projects are forthcoming. Therefore although contract awards, according to SAFCEC, were slow out of the starting blocks during the first quarter of 2006, this should be short-lived when work on the Gautrain and various new Football World Cup stadiums gets underway.

In the booming construction environment, equipment shortages are of concern when it comes to World Cup projects. The joint managing directors of a prominent South African construction company told iC, “There are world wide shortages of just about everything, and stadium construction is highly specialised with lots of small footprints, each requiring a tower crane, so it is not uncommon to see up to 16 tower cranes on each stadium. As far as we know, there are no surplus tower cranes lying about so orders need to be placed overseas.”