2010: Construction Companies in Capacity Crunch; Pressure Is Mounting on South Africa's Building Industry, Forcing Up Costs and Putting the Squeeze on Skills and Raw Materials. Tom Nevin Reports
Nevin, Tom, African Business
South Africa has a highly efficient construction industry and its consultants, engineers and contractors are busy on projects throughout the country and the continent, and around the world. In fact they've never been busier. Money has never been more available.
So this might not be the best time to start building a clutch of fancy 2010 soccer stadiums. The current demand for construction is too high, there is too much development funding around and not enough skills capacity to get the job done. Bulging order books and scant competition is forcing construction prices sky-high. A soccer stadium that was estimated at R500m ($75m) just a year or so ago is suddenly nudging R750m ($102m at current conversion rates).
In a contrary twist of fortune, South Africa's economic cycle is peaking at a time when the football fraternity needs to start putting up new soccer stadiums and upgrading old ones, at a cost of billions of rands in the best of times. But time is running out and the World Cup planners don't have the luxury of waiting for more amenable conditions.
Trevor Manuel, South Africa's finance minister, has also just announced a R50bn ($6.84bn) over-collection in the 2005/06 tax year. What is he going to do with the money? He's going to spend it, but not on soccer stadium construction cost overruns. He wants to provide more social infrastructure.
This development, welcome as it might be, will exert more pressure on the construction sector and force up prices even higher in an economic climate that spoils local construction companies for choice.
South Africa desperately needs more schools, clinics and hospitals, access for the poor to clean water and sanitation, and the affordable housing programme is about a million units behind schedule. Only the most fanatic of football followers would argue for stadiums ahead of more places to treat the sick and house those without shelter, especially now that the exchequer has sufficient funds to get on with the job. So while there's plenty of money to go around, there's also a desperate incapacity to spend it. When the bidding construction companies redid their estimates and came up with new costs, they had swelled "considerably beyond the R8.4bn ($1.15bn) set aside by national government for them", said the National Treasury's deputy director-general for the World Cup, Malcolm Simpson. Total escalations were estimated at around R4bn ($547m).
In Simpson's view, the limited competition among local construction companies--exacerbated by skills and materials shortages in the country--was the culprit behind the price variations. He suggested to parliament's finance committee that the answer might lie outside South Africa's borders.
Sword of Damocles
Opening the country's market to foreign construction companies "to come and do this work" could be doubly beneficial in that it would also make the construction sector more competitive. A big part of the problem is that the local construction industry is dominated by "only six or seven large contractors" and as a result it lacked a competitive edge, he said.
Whether or not the Damocles sword of foreign competition did the trick is not easy to say. But when the municipalities sat down with the construction companies again to discuss the escalations, they were able to trim them down by about R2bn ($273.5m). But the government's still not budging and more pencil-sharpening will have to happen.
Predictably, however, both the domestic construction industry and trade unions reacted indignantly to the notion of calling for help from builders beyond South Africa's borders. Mziwakhe Hlangani, spokesman for the National Union of Metalworkers of South Africa, said employers have had ample time to train up indigenous skills but had not done so, and yet they complain when the crunch comes. He called for urgent human resources development to beef up the skills gap. …