Virus a blow for government’s civil construction projects – economist

More than 75{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of respondents in the latest FNB/BER Civil Confidence Index are dissatisfied with prevailing business conditions.

“What we are seeing is a sustained, albeit slow, improvement in construction activity which has gradually lifted sentiment,” Siphamandla Mkhwanazi, property economist at FNB, said in a statement released on Tuesday.

The latest index shows an increase to 24 in the first quarter of 2020 from 22 in the last quarter of 2019 – the fourth consecutive quarterly increase. It rose 7 points between the third and fourth quarters of 2019.

The index can vary between a maximum of 100 (which indicates that all respondents were satisfied with prevailing business conditions) and a minimum of zero (indicating that all respondents were dissatisfied). A level of 50 indicates that the respondents are equally divided between those satisfied and dissatisfied.

Slow improvement – before virus struck

In the last quarter of 2019 confidence in the civil construction industry improved on the back of higher activity. In the first quarter of 2020, while activity was effectively unchanged, higher profitability lifted sentiment, explains Mkhwanazi.

According to Statistics South Africa, the real value of construction work declined by 1.6{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} year-on-year (y-o-y) in the fourth quarter of 2019 and the first quarter index results imply a similar decline in activity, in Mkhwanazi’s view.

He says the latest index reflects more or less stable growth in activity in the first quarter and the short- to medium-term outlook relfected by respondents were more upbeat. Fewer firms reported that insufficient demand for new work – a proxy for the state of order books – is a constraint to their business.

Tender activity

According to Mkhwanazi, the more upbeat outcome for order books in the first quarter is likely related to increased tender activity, specifically around transport.
He points out that in the national budget more than R308 billion was allocated to transport and logistics related infrastructure through to the 2022/23 fiscal year. According to the 2020 budget review, growth in public infrastructure spend is expected to average only 1.9{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in nominal terms between 2020/21 and 2022/23.

“It seems that some of this work is already starting to materialise. Furthermore, construction activity related to renewable energy projects is continuing for now,” says Mkhwanazi.
“The increased tender activity is also reflected in tendering price competition, which eased, indicating less competition in the first quarter.”


A number of headwinds still exist which, he cautions, could still derail any significant recovery. One such concern for him is the timing and magnitude of future rounds of the Independent Power Producer programme and, with the exception of transport and logistics, the broadly downbeat outlook for infrastructure investment by the public sector.

Mkhwanazi told Fin24 on Tuesday that that the first quarter survey was conducted before the first domestic cases of Covid-19 in SA.

“Sentiment has, over the past couple of quarters, been improving (although from a very low base). This has been mainly on the back of investment activity in the renewable energy space, as well as the anticipation of projects in the transport and logistics space,” he said.

“With the Covid-19 outbreak, it’s uncertain whether these will go ahead as planned. With restrictions on goods and human movement, it’s unclear whether the said entities will have a strong enough balance sheet to forge ahead with the projects.”

At this stage, for him the best case scenario is that these projects are delayed.

“In any event, there are already significant disruptions along the value chains, which means disruptions on civil activity may be inevitable,” he adds.
“As such, we expect the recent gains in civil confidence to be reversed as a result of Covid-19 and the lockdown.”

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