Downgrades likely to knock spending on infrastructure
EXPENDITURE on infrastructure was likely “to take a knock to some degree” after the downgrades in South Africa’s credit ratings, according to construction business and strategic information services company Industry Insight.
In an environment in which the government was consolidating its budget, this would be “quite dire for the construction sector as a whole”, Industry Insight economist David Meterlerkamp said in a first-quarter report on the industry.
Construction
Meterlerkamp said the nominal value of construction project awards increased 25 percent year-on-year in the first quarter of this year following an increase of 7 percent in the fourth quarter.
He said there was a 44-percent increase in the nominal value of higher-value projects awarded.
But Meterlerkamp said tender activity slowed year-onyear by 12 percent in the first quarter following a 22 percent year-on-year decline in the fourth quarter.
Meterlerkamp said the outlook for the construction sector was relatively negative.
He said infrastructure spending by the different levels of government and state-owned enterprises drove growth in the civil sector, with public spending making up between 75 percent and 80 percent of the total market.
Meterlerkamp said infrastructure spending was therefore the key indicator of the direction in which the industry was moving.
He said the national expenditure estimate for this year was that spending on infrastructure would grow only 4 percent in nominal terms over the threeyear period of the mediumterm expenditure framework. This was negative in real terms.
He said the most positive information disclosed in the 2017/18 budget was that spending on transport and logistics infrastructure was expected to grow 8.9 percent in nominal terms over this three-year period. This category was the largest in terms of infrastructure expenditure, accounting for 34 percent of total infrastructure expenditure, he said.
However, Meterlerkamp said a relatively large portion of this finance would go to capital expenditure, such as new locomotives.
“Spending on water and sanitation infrastructure is also expected to grow by only 6.5 percent in nominal terms, and spending on power infrastructure… to contract by 0.1 percent over the next threeyear period, with the construction of the Medupi and Kusile power stations coming to an end,” he said.
Meterlerkamp added that the building sector was driven predominantly by the private sector and general economic drivers.
The nominal value of construction project awards increased 25 percent in the first quarter of this year.
He said the macro-economic environment was the main driver from a demand perspective, but this environment was extremely depressed, with very low levels of consumer and investor confidence in the economy.
“This does not bode well for the building sector, which we expect to mildly contract over the next two years,” he said.
Meterlerkamp said the growth in the residential market, as evidenced by Statistics SA data on the square metres of apartment and townhouse developments approved every month, was positive.
He added that over the past 12 months, municipalities had approved 22.6 percent more square metres of flats and townhouses.
Meterlerkamp said that in a dire economic environment consumers preferred these types of accommodation because they were cheaper to buy and maintain.
However, this segment of the market was not sufficiently large to boost the residential property sector overall.
Meterlerkamp said the growth in terms of both the number and the size of shopping centres approved over the past three to four years was unsustainable.
“The approval of shopping centres has biased estimates of non-residential growth upwards over the last few years, which we believe has now firmly come to an end,” he said. AFRICA is a key partner for the EU, especially in the energy and water sector with close to R200 billion invested in renewable energy in South Africa.
Danish Ambassador to South Africa, Trine Rask Thygesen, told delegates at the African Utility Week conference in Cape Town yesterday that massive investment could be directed from renewable energy projects.
Thygesen said this translated into establishing 85 percent of foreign direct investment coming into South Africa in 2015, resulting in the price of solar power sold by independent power producers coming down 40 percent more than originally planned.
She said Denmark was currently setting similar structures all over the continent to light it up.
“Newer clean coal power plants have been optimised to become a source of variable energy. They start up faster, are lower and stabler and can be used as quick and flexible back-up when the sun or the wind is not around.”
KPMG, a major sponsor of the event, said power utilities sectors across Africa had for years been a contentious issue underpinned by a number of challenges including, affordability and infrastructure, among others.
Challenged
De Buys Scott, head of deal advisory and infrastructure for KPMG in South Africa said: “Utilities on the continent are challenged, and while much talk has been centred around where Africa is lacking in utilities, it is important to remember that infrastructure forms a critical pillar in mobilising utilities development on the continent.
“The current infrastructure investment backlogs of around $90 to $100 billion (R1.19 to R1.33 trillion) remain one of the most prominent challenges in Africa and will form a cornerstone to discussion at this year’s event.”
Scott said infrastructure development remained at the core of improvement, growth and realising real change within the sector.
“However, as an example, if we consider that Africa has the lowest electrification rate globally then it is clear that infrastructure still poses a key challenge, one that is and will continue to negatively impact the continent if not addressed.”
Frank Rizzo, technology lead for KPMG South Africa said: “Globally, we are witnessing the emergence of what is known as the Internet of Energy, powered by interconnectivity.
“This speaks to the improved operational efficiency within this sector through the use of internet enabled resources, bringing technology to the fore as a key driver of operational effectiveness and innovative solution development.”