CONSTRUCTION INDUSTRY

1. CONSTRUCTION INDUSTRY PROVIDING THE FOUNDATION OF ECONOMIC GROWTH A Presentation Compiled with SAFCEC and inputs from Master Builders, CESA for the business led 5 Year Sector Plan Presentation to Minister Nkosasana Dlamini Zuma and President Cyril Ramaphosa

2. Introduction: Infrastructure and Inequality There is robust evidence that the provision of good quality infrastructure can be a powerful tool for poverty reduction, has a positive effect on the long run growth and a negative effect on income inequality. Calderón and Servén (2008)

3. South African Construction Industry: Contribution to RSA Economy South Africa’s existing infrastructure stock has been designed and built by members of CESA, MBSA SAFCEC. It is impossible to conduct an average day without using our product. The existence of a South African competent, capable and safe construction industry is a national asset that must be supported The buildings we sleep, work and manufacture in, the water that comes out of our taps, drink and wash in, the roads we get to work on, the airports we travel from, the ports and railway systems we move our goods on are our product Foreign companies have come, tried and failed to compete with the South African industry We pride the reputationand competence of our banking sector. Similarly we must be as proud if not more,of the ability of our world class Construction Industry as the NATIONAL ASSET it is.

4. National Construction Industry: Growth and Employment • The industry is ideally suited to assist in driving South Africa out of this low growth stagnation in alignment with the NDP. • At the same time providing the foundation for further accelerated growth whilst immediately reducing youth and unskilled unemployment throughout the whole country • Through the multiplier effect downstream industry and manufacturing growth and employment initiated. In a high unemployment economy the Construction Industry is a disproportionate employer of citizens It is a deep and broad based industry catering for thousands of businesses of all sizes and geographical locations. In a low skill resourced economy the Construction Industry is able to employ a disproportionate amount of unskilled citizens

5. TRANSFORMED Top Empowerment Companies for 2018 All the listed Construction entities in the top 60 of Top 100 companies in RSA

6. Sector Trends : Sector in Doldrums • Overall construction sector in doldrums (especially civils) • Higher end of the sector feeling the most pain • Construction Company failures as a result • Engineering Companies downsizing • Retrenchments and job losses at present • We are in crisis but can recover if investment recovers

7. Sector Objectives Investment • Realise Private investment in PPPs including (power R100bn non Power R40bn) Supply Chain • At 4.9% of GDP invest R100m into developing supply chain enterprises. • Procure R40bn from QSE and black owned businesses Skills Development • At current levels of investment and trends skills development will decrease as the large contractors exit or fail. • At increased investment levels skills development expenditure is expected to increase to ~R388m Sector Social Investment • With Increased Investment social contributions expected to increase to R41million by 2024

8. Sector Objectives Total Employment • With GDP growth 1% to 3% over 5 years • Construction investment increasing to 4.9% of GDP Total Employment can reach ~2m with youth at 840k. NEW Jobs • With same GDP and construction turnover assumptions we can potentially create: • 215 000 unskilled jobs • 200 000 semi skilled jobs • 85 000 skilled jobs

9. Sector Trends : Key Inhibitors • Drop off in Expenditure • Private Sector not investing due to uncertainty and low growth • Government has reduced expenditure or is not able to spend budget • Loss of technocrats in Government and SOEs. • Loss of Competency in government technical departments and SOEs • Government no longer possesses the planning and technical skills to procure. • Fair Legal Honest Procurement • Illegaland Inconsistent Transformation Driven Procurement Rules. • The use of “Objective Criteria” as prequalification to tender. • Lack of EE Graduates and enforced Employment Equity • The education system does not produce the required graduates with the desired demographics to implement employment equity. • Critical Developmental Skills loss out of sector and country • Construction Mafia • The construction mafia are destabilizing and disrupting most projects across the country resulting in delays and cost increases • They employ extortion tactics that threaten the safety of the employees in the sector.

10. Government Actions Required • Shift from low value, policing policies to high value growth focused policy. Become a government supporting a developmental state not one administrating red tape. • Attract FDI. Create certainty of policy around the NDP implementation and key sectors that attract infrastructure investment, mining, power, gas master plan • Change the narrative to boost morale. Stop vilifying the industry and promoteit as the critical development engine it is. • Return to rule of law with consistent honest, fair and competitive procurement. • Enforce the return to the PPPFA rules for procurement 90/10 or 80/20 based SOLELY on the scorecard. • The Scorecard encompasses the national B-BBEE policy not the whim of a procurement officer. • Scorecards drive transformation implementation thereunder by private sector • Scorecard implementation requires investment in business systems, skills and resources. • Erratic tender specific transformation objectives nullifies the efforts made to invest in the scorecard. • Remove the ability of various levels of Government to invent often contradicting tender “objective” criteria

11. Government Actions Required 6. Pay on Time – lack of cash ,coupled with no access to credit killssmall business 7. Rebuild the a-political technical bureaucracy throughout the state that is competency and career based irrespective of race or nationality. 8. Resolvethe issue of the construction mafia and unsubstantiated local political promises surrounding infrastructure construction. 9. Increase construction investments to ~5% of GDP to drive growth Leverage the PPP pipeline fund a portion and drive through to implementation and augment finance options with and Infrastructure bonds 10. Publish a single project pipeline from all departments and SOEs demonstrating where the government infrastructure investments will be made.

12. THANK YOU “ The stimulus and recovery plan prioritises infrastructure spending as a critical driver of economic activity” President Cyril Ramaphosa (21 September 2018) FOR FURTHER DETAILS OR REFERENCES PLEASE CONTACT: Webster Mfebe: CEO South African Forum of Civil Engineering Contractors(SAFCEC) Email: webster@safcec.org.za; Cell: 082 075 1730 Russel Adams: Industry Input Coordinator  Email: Russel _Adams@wbho.co.za; Cell: 083 463 8445

13. CONSTRUCTION INDUSTRY PROVIDING THE FOUNDATION OF ECONOMIC GROWTH Detailed Presentation Slides

14. HISTORY AND CONTRIBUTION

15. Introduction: Infrastructure and Growth • Infrastructure is the fixed asset that provides the foundation for economic activity • Infrastructure investment benefits growth by: • its direct effect on the reduction of costs of inputs into the production process • its indirect effect on the improvement of productivity. • positive externalities created such as improving competitiveness, international trade and regional integration initiative (Fourie 2007) • Academic study over 88 countries over the years 1960-2000 demonstrate that a rate of increase in the provision of infrastructure of between 10% and 14% increases the output per worker in the economy by a full 1%. [Calderon, Benito and Serven (2007)] • In the case of China, study has shown a change in physical infrastructure provision of as low as between 2.4% and 3.7% was able to result in an increase of real GDP per worker of a full 1%. Sahoo, Kumar Dash, Nataraj (2010) • In the case of South Africa, study identified road infrastructure is a strong driver of GDP growth concluding that if infrastructure is provided in response to an appropriate cost benefit analyses, then it will more likely promote GDP growth and failure to provide it will likely hamper growth.Perkins, Fedderke and Luiz (2005) • “ The stimulus and recovery plan prioritises infrastructure spending as a critical driver of economic activity” President Cyril Ramaphosa (21 September 2018)

16. Introduction: Infrastructure and Inequality • Infrastructure provision may disproportionally affect the income of the poor through better, more cost effective access to markets as well as increasing the value of their assets such as land or human capital. • Common evidence shows that provision of infrastructure and in particular in rural road infrastructure improves the development of the rural markets, increased average wages in regions studied as well as increased opportunity to diversify from agricultural activities. • Empirical study found that average inequality in the world, measured in terms of the Gini coefficient, declined by 3 basis points between the periods of 1991-95 and 2001-5 due to infrastructure development. The largest benefactor in this regard was South Asia, which saw a 6 basis point decline in its Gini coefficient as a result of infrastructure development. Calderón and Servén (2008)

17. Introduction: Infrastructure and Inequality There is robust evidence that the provision of good quality infrastructure can be a powerful tool for poverty reduction, has a positive effect on the long run growth and a negative effect on income inequality. Calderón and Servén (2008)

18. SOUTH AFRICAN CONSTRUCTION

19. South African Construction Industry: South Africa’s existing infrastructure stock has been designed and built by members of CESA, SAFCEC and MBA. It is impossible to conduct an average day without using our product. The existence of a South African competent, capable and safe construction industry is a national asset that must be supported and cultivated The buildings we sleep, work and manufacture in, the water that comes out of our taps, drink and wash in, the roads we get to work on, the airports we travel from, the ports and railway systems we move our goods on are our product Foreign companies have come, tried and failed to compete with the South African industry We pride the reputationand competence of our banking sector. Similarly we must be as proud if not more of the ability our world class Construction Industryas the NATIONAL ASSET it is.

20. National Construction Industry: Employment The industry is ideally suited to assist in addressing youth and unskilled unemployment 1. In a high unemployment economy the Construction Industry is a disproportionate employer of citizens 2. In a low skill resourced economy the Construction Industry is able to employ a disproportionate amount of unskilled citizens

21. National Construction Industry: Profit and Exports 3. It has historically been one of the most cost efficient at delivering world class quality infrastructure 4. Through the multiplier effect it drives activity in additional sectors such a local manufacturing, ICT, maintenance, audit, banking which will otherwise go offshore if we lose our local competency The larger listed entities have moved to exporting their services with • 48% of revenue generated offshore and • ~R5bn in foreign earnings back into RSA per annum

22. National Construction Industry: National Asset It is a deep and broad based industry catering for thousands of businesses of all sizes and geographical locations. • Stimulus in the construction industry transmits far and wide quickly. • It cultivates self sufficiency and national pride in our nations abilities • It should reduce cost of infrastructure through local competency, risk interpretation and currency risk. • Use of taxation revenue in the national economy is sustainable and stimulatory and is positive in terms of the balance of payments.

23. National Construction Industry: Empowerment Top Empowerment Companies for 2018 All the listed Construction entities in the top 60 of Top 100 companies in RSA

24. National Construction Industry: Empowerment Listed Construction one of the most transformed industries and ahead of Top 100 transformed companies.

25. SECTOR TRENDS

26. Sector Trends : Access to Work Opportunities • Infrastructure Spending down • Large projects number down • Housing and related infrastructure up • Private investment is down with unwillingness to invest and economic slump • Available projects are being packaged to favour smaller contracts • Either an apparent policy or possibly an unintended consequence to remove the major contractors from the economy in favour of narrow based transformed entities • Inability to spend budget allocations

27. Sector Trends : Demise of the large Contractors • Overall construction sector in doldrums (especially civils) • Higher end of the sector feeling the most pain • Construction Company failures as a result • Engineering Companies downsizing

28. Sector Trends : Demise of the large Contractors • Listed contractors have lost almost 70% of their value over the • Survival of the sector is in jeopardy

29. Sector Trends : Access to Work Opportunities Illegal and Inconsistent Transformation Driven Procurement Rules • Transformation objectives are continuously changing in the tender market. • This disrupts the ability to plan and structure the business accordingly to maintain ability to tender. • SOE’s have adopted their own transformation agendas based on their desires which are often not in alignment with current legislation or policy. • Transformation procurement rules/criteria used anti competitively to ‘guide’ tenders to specific entities. • Objective criteria is becoming the vehicle for this whereby tenderers are disqualified before their price or PPPFA scorecard points are evaluated. • Objective criteria relating to B-BBEE are then set to suit. • Local databases of suppliers also being used to exclude.

30. Sector Trends : Access to Work Opportunities Illegal and Inconsistent Transformation Driven Procurement Rules • The use of “Objective Criteria” as prequalification to tender are being used in the incorrect application of the PPPFA to achieve this as per example and below criteria • “PPG: A Priority Population Group is defined as meaning: Historically disadvantaged Individuals who fall into population groups that were not offered franchise in national elections before or after the introduction of the 1984 tri-cameral parliamentary system and only received their franchise during 1994.”

31. Sector Trends : Employment Job losses: • Lack of work has led to reduction in labour force sizes • large number of retrenchments or through downsizing in the consulting and contractor segments Construction Skills flight out of South Africa • We have had well educated, experienced and hard working professionals that are highly sought after world wide for this reason. • Minimal to no opportunities locally combined with employment equity obligations and crime provide the impetus for these skills to leave. Construction Skills are long term investments • As a country we have invested a huge amount into developing these skills. Their loss is akin to capital flight out of the country. • Current skills flight trend will result in local capacity problems if the economy turns. We will have to buy in skills at high cost. Source SAFCEC State of the Industry Report

32. Sector Trends : Key Success Factors Consistent workflow • Low margin business requires constant cash inflow to maintain employment, improve on business processes and build up a balance sheet. Experienced, Competent Employees. • Construction is essentially a services industry and experienced staff are essential to the success of a business. • Skilled and competent people must manage very expensive resources. Small errors result in big losses • Infrastructure design and delivery skills are slow to learn and require experience to execute efficiently Delivery • Low margins with every project being different requires experienced skills to complete on time and on budget. • Delivery in accordance with estimates is a key success factor for a construction team • Strong Safety, Quality and Environmental management systems Risk management • Identifying and mitigating cost effectively for delivery risk • The ability to respond and manage risks as part of the delivery as they are certain to occur Fair tender opportunities • Corruption free tender environment with equal opportunity for technically competent contractors. • Rigged tenders destroy willingness to tender and morale.

33. Sector Trends : Key Failures 1. Loss of technocrats in Government and SOEs. • Loss of Competency in government technical departments and SOEs • Government no longer possesses the planning and technical skills to procure. • Government appointments in key technocratic positions lack competency for task • Result: -Budget cannot be spent on infrastructure. -Tender process can be manipulated -Infrastructure and Service delivery collapse

34. Sector Trends : Key Failures 2005 1. Loss of technocrats in Government and SOEs. • This is driving implementation costs up. Procurement skills, technical skills, planning skills, contract management skills have been lost contributing to massive cost overruns, under delivery and high consultancy fees. • NMPP, Kusile, Medupi, collective cost overrun of over R325bn estimated. • Based on RSA total construction contribution to GDP in 2018 this equates to ~ 3 years of total construction expenditure for the entire industry • Construction Skills are long term investments, the loss of the knowledge and experience is costing our infrastructure delivery performance 2015 Age and Demographic Change at Local Government SOURCE: NUMBERS AND NEEDS IN LOCAL GOVERNMENT – UPDATE 2015 ALLYSON LAWLESS

35. Sector Trends : Key Failures 2. The South African education system coupled with Employment Equity. • The education system does not produce the required graduates with the desired demographics to implement employment equity. • There are simply not enough matriculants with international standard matric passes in accordance with the EE demographic targets to enter the rigorous tertiary training requirements in the sector. • Forcing EE onto the construction sector and within departments for these skills without government providing the candidates is illogical and is causing a loss of skill within government and industry.

36. Sector Trends : Key Failures 3. The Construction Mafia • Policy uncertainty in relation to transformation procurement rules combined with a general state of lawlessness has resulted in violent mafia styled extortion at construction sites 4. The Community Expectations • Politically made promises to the communities not translated into contracts creating major disruptions and cost impacts on sites.

37. SECTOR VISION

38. Sector Vision • Vibrant and respected world class top African full service infrastructure and building delivery provider priming Southern African development. • Most cost effective whilst sustainable infrastructure delivery service provider in Africa • Safe and reliable with an experience building and upskilling workforce through work. • Growth driven radical economic transformation not redistributive narrow based racial transformation

39. SECTOR KEY FOCUS AREAS

40. Sector Key Focus Areas • Short term (1-2 years): • Survival • Retain skills so there will be something left if things turn • Rebuild staff morale • Medium Term (2-4 years) • Return to profitability • Rebuild competitiveness and efficiency • Rebuild capacity to 2010 levels • Absorb the unemployed • Longer Term (4-5 years) • Return to first in class in Africa • Expand capacity to become regional

41. SECTOR OBJECTIVES

42. Sector Objectives 4.9% of GDP Turnover and Investment • Increase Construction Turnover from current 3.5% to 4.9% of GDP • Immediate increase in youth and unskilled Employment Source: Global Infrastructure Outlook. Infrastructure Investment needs, 50 Countries, 7 Sectors to 2040 Source: United Nations: https://unstats.un.org/unsd/snaama/dnllist.asp

43. Sector Objectives Investment • Realise Private investment in PPPs including (power R100bn non Power R40bn) Supply Chain • At 4.9% of GDP invest R100m into developing supply chain enterprises. • Procure R40bn from QSE and black owned businesses

44. Sector Objectives Total Employment • With GDP growth 1% to 3% over 5 years • Construction investment increasing to 4.9% of GDP Total Employment can reach ~2m with youth at 840k. NEW Jobs • With same GDP and construction turnover assumptions we can potentially create: • 215 000 unskilled jobs • 200 000 semi skilled jobs • 85 000 skilled jobs

45. Sector Objectives Sector Social Investment • With Increased Investment social contributions expected to increase to R41million by 2024 • Skills Development • At current levels of investment and trends skills development will decrease as the large contractors exit or fail. • At increased investment levels skills development expenditure is expected to increase to ~R388m

46. KEY PROGRAMMES

47. Key Programmes Critical Developmental Skills • Identify the infrastructure delivery sector as a key CriticalDevelopmentalSkill sector. • Promote recruitment in government in infrastructure delivery positions based solely on competence and experience for such critical skill sets to utilize and retain what we already have. • Provide, where necessary, explicit employment equity exemptions for such Critical Developmental Skill s (CDS) appointments • Creative Solutions: Consider allowing CDS professionals after retirement age to work tax free. Enforce Treasury Procurement Regulations • Consider Independent tender adjudication, adopting certain principals of the historical Tender Boards

48. Key Programmes Access to Guarantee Facilities • Access to guarantees and credit is a key inhibitor for small contractor growth. • Cashflow and ability to provide guarantees are real limiting factors for developing contractors • Establish a national guarantee fund and collateral facility to assist eligible contractors and professionals grow their delivery capacity and grow their balance sheets. • Assess potential collaboration with the Tirisano Fund Accelerate the PPP Programmes • Treasury to accelerate the processing of PPPs to bring these to market. • PPPs provide large private investment into FDI and will assist to retain skills • Government to consider providing sovereign support to non-monetisable infrastructure such as water and sewer reticulation. Augment Financing with the Introduction of Infrastructure Bonds • Infrastructure bonds should be considered as a financing mechanism to augment existing finance options.

49. GOVERNMENT SUPPORT AND POLICY CHANGE

50. Required Policy Change • Shift from low value, policing policies to high value growth focused policy. • Become a government supporting a developmental state not one administrating red tape. • Stop cadre deployment into the Critical Development Skills spheres of government and separate the technical bureaucracy in government from politics. • Political direction can change but the technical skills and policy inside government should be career focused and not election cycle appointments • Permit competency based appointments irrespective of age or race. Retain and use our existing skills base while we still have it.