Construction Value Chain Analysis

1. Construction Value Chain Analysis Identifying opportunities and constraints for increasing black SME involvement in the construction industry SEDiC ‘09

2. Presentation purpose • Provide an example of a process by which an organisation with limited resources seeks to focus its enterprise development efforts. • Share the results of the study. • Indicate the possible direction for better focused enterprise development support in construction.

3. Introduction • The Programme: • saibl (South African International Business Linkages) • The Funder: • United States Agency for International Development (USAID) • The Implementing Partners: • Corporate Council on Africa • ECIAfrica Consulting • National Business Initiative

4. Approach & Goals DEMAND SUPPLY SUPPORT ENVIRONMENT Mobilise corporate support for black supplier development and linkages Build the competitiveness of black enterprises through improved management and production Strengthen governance and services of associations to benefit members’ needs Business Associations Corporations Black Owned Enterprises Business Service Providers (BSPs) Trade Facilitate access to corporate procurement and export opportunities Facilitate access to international markets through matchmaking Strengthen the capacity of BSPs to deliver quality and affordable services to SMEs

5. Sector targeting SA-Based Large Enterprises Sector 1 Agribusiness Sector 2 Mining Sector 3 General Manufacturing Sector 4 Automotive Sector 5 Construction Sectors (other): BPO Oil, Gas & Marine Medium enterprises Small enterprises Micro enterprises

6. Purpose of the Study • Identify opportunities for increasing black SME involvement in construction value chain • Recommend interventions to assist process of increasing black SME involvement

7. Methodology • Value chain mapping • define boundaries of construction sector • identify functions and participants • Identify channels • Identify driving forces for black SME development • Initial identification of opportunities through desk-top review Verification of opportunities and identification of constraints and interventions through interviews

8. Summary of overview of sector • Total income: R174.5 bn (2007) -Building construction R60 bn - 34.5% -Civil engineering construction R51.7 bn – 29.6% • Both public and private sector investors important sources of demand • Large construction companies (turnover > R26 million) : 58.2% of total income -i.e. > 40% (> 70 bn) already going to SMEs • Relatively low profit margins (average 4.1% in 2007) -Highly competitive industry

9. Value chain map • Construction industry value chains inextricably linked value chains other industries • No standard definition of boundaries of “construction industry” - CIDB excludes materials suppliers -Construction sector BBBEE charter includes materials suppliers • Defined sector to include: -Construction-specific services (eg construction-related assembly) -Secondary manufacturing and supply of building elements for which local (SA) supply can clearly be competitive (eg sand, bricks, steel fabrication)

12. Channels (1) • Construction services almost exclusively provided by private sector now (public sector has outsourced) • Construction companies (contractors) and consulting companies (professional services) • High level of vertical differentiation (subcontracting) in construction companies • Large companies only employ 35.6% of 543 686 workers in industry, despite accounting for 58.2% of income • Marked shift to casual employment in recent years

13. Channels (2) • Secondary manufacturing and supply of building components generally dominated by large companies - Economies of scale make it difficult for SMEs to be competitive • SMEs can compete in some areas of secondary manufacturing and supply with low capital intensity and high transport costs, eg sand

14. Driving forces • Explosion in numbers of black SME contractors since 1994, driven by: -Massive provincial and municipal government expenditure on small projects -PPPFA and other BEE policies • Codes of Good Practice for BBBEE and mining and construction charters main drivers in private sector -Most construction companies have both public and private sector clients -Requirement in Codes for public sector bodies to take BEE into account in procurement should have strong cascading effect in construction supply chain

15. 75%

18. Key points from the statistics • Construction industry becoming increasingly characterised by mostly-black SME contractors and mostly-white large contractors • On average across sub-sectors, over 80% of contractors registered between grades 1 and 4 are black • Considerable variation between subsectors -GB and CE: 80% to grade 5 -Mechanical and electrical: 80% to grade 1 • Very high numbers of very small black building and civil engineering contractors -Cannot be sustained by demand

19. Areas of opportunity (1) • Initial identification of priority opportunity areas based on applying following criteria to all sub-sectors: -Low irreversible barriers to entry • Not highly capital intensive • Not highly expertise intensive -High level of demand and potential growth -Not already high level of black SME penetration -Buyers have an incentive to procure from black SMEs -Maturity of sub-sector -Sub-sectors with strong linkages to other sectors

20. Areas of opportunity (2) • After verification through interviews: -General building and civil engineering contracting, only for medium-sized contractors (grades 6 and 7) -Mechanical and electrical engineering for small and medium-sized contractors (grades 3 – 7) -Consulting -Simple specialist works such as plumbing, landscaping and road marking -Supply of building materials such as sand -Secondary manufacturing of simple construction components

21. Key constraints • Lack of business and management skills -Medium-sized enterprises can procure technical skills • Lack of experience • Difficulty breaking into large contractors’ existing sub-contracting networks • High quality standards specified by client bodies can be a barrier to entry for secondary manufacturing of simple building components

22. Interventions • Large contractors can: • Provide subcontracting opportunities to black SMEs in identified areas of opportunity • Mentor subcontractors to develop managerial and business skills • Provide subcontractors with experience required to move up grades to address inequities in statistics and increase competition in medium grades • Large contractors should avoid deliberately developing more black SMEs in subsectors where there are already too many small contractors • Clients can review specifications for simple building components to remove possible over-specification