State building could stall as election nears

Accentuate CE tells Alistair Anderson ‘there is a lot of extra bureaucracy’ before a poll

THE recovery in the construction sector could be stunted by electioneering early next year, says Fred Platt, CEO of infrastructure development company Accentuate.

He expects construction activity to be steady for the rest of this year, but things would die down in the first quarter of next year in the runup to the election. According to the constitution, SA must hold a general election between April and July next year.

“People think that the government suddenly starts going fullsteam ahead with projects. We have found that there is a lot of extra bureaucracy just before an election and it is hard to get projects going,” Mr Platt says.

SA’s construction sector is at the beginning of a recovery from the slump in business that occurred after the rapid activity for the 2010 Soccer World Cup.

Mr Platt only expects the industry to become buoyant in June next year. “After the election, we should see the industry do well. The government knows what it needs to do to develop infrastructure and it will work with the private sector to get this going,” Mr Platt says.

He is just unsure as to how long the recovery will take and how intense it will be before things dip again. “The big question is will the industry go on a slow recovery from here, or will it hit highs quickly? There are many challenges but I

The industrials have worked through the headwinds of the last few years

can assure you the private sector and the state have good plans for the industry,” he says.

Last week, the South African Chamber of Commerce and Industry said business confidence was at a 13-year low.

However, pending elections may not suggest obstacles for construction companies. Even though construction activity did slow in 2009, just before the general election in that year, many factors worked against it, according to Group Five CEO Mike Upton.

“We had many factors by that election. The World Cup was on the horizon, and then the projects picked up. If I generalise I would say that big decisions cannot be made around election time,” he says.

JSE-listed civil engineering group Esorfranki CEO Bernie Krone believes constructors have managed to succeed regardless of political difficulties.

“I haven’t really ever analysed this, but I think prior to the 2004 election construction was in a slump, and in 2009 things were still booming to get the World Cup 2010 projects complete. Things at the moment are pretty depressed generally in the construction market but I don’t think it’s because of a pending election.

“I think this phenomenon may be true in some of the smaller or less stable countries in Africa, but I think SA weathers political issues quite well,” he says.

While an election may be a manageable obstacle for some companies, there are other threats to getting construction back to pre-world economic crisis levels.

One is how labour is managed in SA. Last year, companies were overcome with strikes.

Aveng CEO Roger Jardine said last month he was concerned that labour strikes would threaten the construction group’s earnings and prevent the government’s infrastructure spend from gaining momentum this year.

Mr Jardine said at a results presentation that strikes last year cut 23% off Aveng’s operating profit for the six months to December.

“We face extreme poverty in SA. We need to take stock of where we are as a country. We really have to approach this as SA Inc because strikes are affecting the production of the economy and investor sentiment,” he said.

Stanlib equity analyst Anashrin Pillay is a bit more upbeat. He says that construction companies and related industrial businesses should see earnings growth in line with gross domestic product growth (GDP) this year.

“I think the industrials have generally worked through the headwinds of the last few years,” Mr Pillay says.

The economy grew 2.4% last year. Economists are not optimistic about growth for this year. Nomura economist Peter Attard Montalto says the weak rand, threats of higher inflation and unmanageable wage increases see economic growth slogging along at 2.6% this year, while next year’s GDP growth is forecast at about 3.4%.

However, SA’s large construction firms are promising profits this year. Murray & Roberts, Wilson Bayly Holmes-Ovcon and Group Five have shown marked improvements in revenue and profit in their interim results to December.

Larger constructors and Accentuate have been involved in state projects in recent decades.

The government has proposed a R4-trillion infrastructure roll-out over the next 15 years to focus first on improving the economies of lower-income provinces. The state has devised a 20-year infrastructure pipeline consisting of 18 strategic infrastructure projects.

The projects involve opening up a coal corridor from the Waterberg in Limpopo to export terminals in Maputo and Richards Bay, and further developing the Durban-Gauteng transshipment corridor.