‘Infrastructure spending on track’

Government expenditure on capital and infrastructure projects had been in line with forecasts in recent years, while new construction expenditure was only R1.5 billion below its forecast last year, a new report released yesterday said. The report, SA Construction by PwC, said concern had been aired in various quarters about the government’s ability to roll out capital and infrastructure programmes, as well as the accuracy of capital forecasts. But it said a comparison of actual construction expenditure with forecasts made in the past three years showed that apart from the pre-credit crisis 2009 forecast, actual expenditure had been in line with forecasts.

The report said actual construction expenditure last year was R7.3bn below the forecast made in 2011. But it said for new construction expenditure, the shortfall was only R1.5bn with underspending of R6.5bn by municipalities and R8.5bn by extra budgetary accounts partially offset by R11.3bn in overexpenditure by state-owned enterprises. Capital expenditure by public sector institutions remained flat from 2009 to 2011, but last year it increased by 11.7 percent year on year with expenditure totalling R202bn. But the report said the scale of this increase might be misleading because new construction work only increased by 3.5 percent to R137bn while the cost of plant, machinery and equipment purchased rose by 55 percent to R38bn.

Andries Rossouw, the energy and mining assurance partner at PwC, said public expenditure growth was looking up and the focus was on energy, transport and water, with 60 percent of the public expenditure coming from Eskom, Transnet and the SA National Roads Agency. Rossouw admitted there was a disconnect between actual state capital expenditure and the perceptions of construction companies about such spending on infrastructure. He attributed this to delays and the failure to award possible tenders that had been on the table, resulting in a lot of construction companies reporting that they had been hurt by tender award delays.

Steve Roberts, the regional leader for risk management at PwC, said delays in major capital infrastructure roll-outs both in the South African and African markets were having an impact on order books and obviously had an impact on the associated holding costs of companies that were expecting to be awarded these contracts. Rossouw said the balance sheets of construction firms were still strong, but they had to be aware of project execution and tender risk, including design risk, and price these into tenders. He believed these risks would lead to more joint ventures being formed for projects to spread the risk. He added that this was already evident on the Kusile power station project, where four of the large construction companies were on site and therefore spreading both the risk and the reward.

He said it was risky for construction companies to take a gamble on improving their margins from uncertified claims on projects without design certainty and the thin construction margins at 2 percent to 3 percent were not sustainable. He said the construction industry had undergone a significant financial decline following the 2010 World Cup, largely because of a decrease in margins achieved as cost pressures could not be passed on to clients due to depressed public and private spending. However, Rossouw said the economic cycle appeared to have bottomed out, with a number of encouraging signs from the financial performance of individual companies, order book growth and public infrastructure commitments.