Criminal mafias still crushing confidence in South Africa
South Africa’s government has plans of ‘turning the country into a construction site’ as a trigger for economic growth, but the impact of the construction mafia remains a major obstacle in the road for those in the industry.
This was highlighted in FNB/Bureau for Economic Research’s (BER’s) Civil Confidence Index, which declined by two points to reach a level of 48 in Q4 of 2024.
This current reading means that a little more than half of respondents are dissatisfied with prevailing business conditions; however, an improvement in overall profitability partly counteracted this.
The South African construction industry is pivotal for socio-economic development and GDP growth, contributing significantly to both employment and the national economy.
Statistics South Africa (StatsSA) reported in March 2024 that the South African Construction sector contributed an annualised added value of R109.5 billion rand to the GDP in Q4 2023.
However, according to data from Stats SA, investment in construction works, in real terms, declined by 5.5% year-on-year (y-o-y) in 3Q2024.
Although down, this marks an improvement from the 9.5% y-o-y decrease recorded in 2Q2024. On a more positive note, when measured on a quarterly, seasonally adjusted basis, the sector showed its first growth since the end of 2022.
Thus, FNB/BER’s survey results indicate that construction activity likely faced renewed challenges in the fourth quarter.
“The underlying weakness in civil construction work is disappointing given the increased rhetoric around the need to accelerate investment in infrastructure,” remarked Siphamandla Mkhwanazi, Senior Economist at FNB.
“Respondents are also still concerned about the construction mafia and a lack of crucial skills within the industry, but this is no longer a new development,” said Mkhwanazi.
One of the most widely publicised woes in the industry in South Africa is that of the construction mafia.
“Extortion in the construction sector has reached worryingly high levels, derailing and delaying projects worth billions of rands,” said national project manager of Business Against Crime South Africa (BACSA), Roelof Viljoen.
However, they are not the sole cause.
According to StatsSA, the construction sector’s GDP contribution has dropped from 4% in 2016 to around 2.3% in 2023.
This is “due to a variety of external shocks as well as internal challenges in the country [including] policy uncertainties, governance challenges and structural challenges within the industry amongst others,” said Infrastructure South Africa (ISA).
ISA also identified some other pressing challenges, which include:
- Budget constraints;
- Economic stagnation;
- The impact of COVID-19 regulations;
- Issues like to do with energy and logistics;
- High inflation driving up material costs;
- Non-payment by subcontractors;
- and disruptions caused by construction mafia extortion.
BusinessTech reported a warning from the Master Builders Association (MBA) North, which said that the country construction industry is up against the ropes due to (among other factors) shrinking margins, unfair practices, and rampant delays or outright refusal to pay subcontractors.
The bright sparks
Despite a continued moderation in activity growth, the FNB/BER report showed that civil contractors reported an uptick in profitability with the sub-index measuring growth in overall profitability increasing to its best level since 2007.
The better profitability offset the effect of weaker activity on the mood of contractors.
Despite the deterioration in activity this quarter, respondents of the survey expect a marked increase in work in Q1 2025.
FNB/BER said that this is at odds with the rating of insufficient demand for new work as a business constraint – a proxy for order books – which remained at around its long-term average level.
“The lack of new demand as a business constraint eased noticeably until early-2023 [and] since then, it has been stable at around its long-term average. Importantly, the index level does not suggest that there is any heightened impetus for infrastructure development,” said Mkhwanazi.
Overall, the Senior Economist at FNB said that “the outcome for confidence was somewhat encouraging, even if it was lower than last quarter.”
“However, the deterioration in activity and the lack of improvement in order books is worrying given how much emphasis is being placed on investment as a catalyst for economic growth.
“This is not to say that it will not materialise in coming quarters, just that this is not what respondents are currently experiencing,” added Mkhwanazi.
Loading ...
