The South African Construction Industry

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The South African Construction Industry

• Its boom timeand we need money to pay for it
• October 2008

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Executive summary

• The South African construction sector is
  experiencing growth of unprecedented proportions
• Public sector spending (including public
  corporations) is budgeted at R600bn (2008/09 to
  2010/11). The next MTEF (2009/10 to 2011/12)
  period shows a budget of R700bn. While this
  includes machinery and equipment categories, the
  construction element will be substantial.
• Commodity-related investment prospects are good.
  Lower metal prices could exert pressure here
  though
• Growth in building activity is subsiding,
  particularly in the residential sector, as higher
  interest rates slow activity
• The growth in activity is broad-based and not
  limited to FIFA World CupTMrelated activity
• The infrastructure market is in for an exciting,
  yet challenging period over the next couple of
  years
• Size and complexity of projects increasing and
  the sheer demand will be exceptional
• Provincial and local government delivery
  challenges need to be overcome
• Skills challenges could become acute, across the
  spectrum
• Financing capacity will be challenged

3

• Macro backdrop
• Project and programme management
• Challenges in the industry
• Absa in this industry
• Conclusion

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The infrastructure industry is booming
Civil Engineering turnover (scenario analysis)
Contribution to GDP growth (2000 based)
Source South African Federation Civil
Engineering Contractors
Source Treasury Medium Term Policy Statement

• The construction industry has been the fastest
  growing industry in the South African economy
  since 2000.
• This trend was initially expected to continue
  well into the next decade on the back of
  exceptional growth expected in civil engineering
  activity and related SMEIP industries.
• This expectation is based on scenario analysis
  conducted by the South African Federation of
  Civil Engineering Contractors (SAFCEC) in 2007.

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A shift in the growth points
Sectoral growth rates across the construction
economy
Source South African Federation of Civil
Engineering Contractors
6
The opening chapterinvestment is well below
where it should be
Gross Fixed Capital Formation Global benchmarks
Global average
Source CIA World Fact Book 2008
7
The construction boom is about more than the 2010
FIFA World CupTM
Economic versus capital stock growth and
industrial capacity utilisation
Growth in GDP outstripping Capital Stock growth
Source I-Net
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The response is overwhelming

• Government Infrastructure improvement
• Eskom - power generation programme
• Transnet - upgrading of ports and railways
• SANRAL - upgrading of roads
• DWAF - water and sanitation programme (new and
  refurbishment projects)
• Private sector investment
• Mining green- and brownfields expansions
• Industrial selective expansions fuelled by
  demand growth

Public authority and public corporation
(budgeted spend - Rm)
Source 2008 South Africa Infrastructure
expenditure estimates (National Treasury
October 2008 budget review)
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• Macro backdrop
• Project and programme management
• Challenges in the industry
• Absa in this industry
• Conclusion

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Project management is vital in our industry

• What is the value of project management to
  lenders
• Managing project risks time, cost, efficiency
• Establishing solutions through integration
• Early risk identification and mitigation
• Effective communication with internal and
  external stakeholders
• Proactive and emergent strategies to maximise
  client solutioning
• Continuous improvements
• Effective human resource management

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How is Absa positioned?
Absa
Project Owner
Solutioning the industry
Learning from the industry
Project fulfilment
Effective planning
Consulting Engineer
Contractor
Monitor Evaluate
Three pockets of activity, three pockets of
opportunity
Source Absa
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Absa learning from the industry
Procurement method best preferred by industry
Procurement solutions
Source Absa survey - SAFCEC / SAACE Annual
Conference October 2008
Source Absa / Mike Lomas

• Procurement to best assist governments backlog
• Innovative solutioning for the industry to access
  the best products and processes

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• Macro backdrop
• Project and programme management
• Challenges in the industry
• Absa in the industry
• Conclusion

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• Global credit markets the sub-prime hangover
• Skills shortages
• Escalating costs
• Guarantee capacity

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The global credit markets a simplistic analysis
of the impact on SA infrastructure
Access to international capital markets
potentially impaired
Due to excessive exposure to the underlying bad
debt in packaged sub-prime mortgages
Market intervention by central banks is aimed at
restoring confidence and eliminating negative
reinforcing forces
Which further leads to money being withdrawn from
emerging markets
With some of the largest banks in the world
having failed, the market becomes reluctant to
place money at risk with a bank, given the fact
that it may be the next bank to topple over
Inter-bank lending dries up Flight to quality
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and its impact on confidence is evident
When do you think the boom in construction will
end?
Source SAFCEC / CESA Annual Conference October
2008
17

• Global credit markets the sub-prime hangover
• Skills shortages
• Escalating costs
• Guarantee capacity

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The shortage in skills has become increasingly
acuteand its a global phenomenon
To what degree are skills shortages affecting
your ability to perform?
Source SAFCEC / CESA Annual Conference October
2008

• At the recent SAFCEC / CESA conference, the
  captains of the construction industry indicated
  that the shortage of skills is affecting their
  ability to perform under contracts.

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with site / project managers being the most
lacked skill of all
What resources are you concerned about?
Source KPMG International Embracing change?
Global Construction Survey 2008

• 84 of respondents say the construction industry
  is not doing enough to tackle skills shortages

- respondents could answer more than one option
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and a sizeable proportion of projects are not
completed on time / within budget
What of projects were completed within budget?
What of projects were completed on time?
Source KPMG International Embracing change?
Global Construction Survey 2008
21

• Global credit markets the sub-prime hangover
• Skills shortages
• Escalating costs
• Guarantee capacity

22
Material price escalation has emerged as the most
common cause of cost overrun
What are your most common causes of cost overruns?
Source KPMG International Embracing change?
Global Construction Survey 2008
- respondents could answer more than one option
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Contractors believe that they are most
susceptible to escalations in materials and
labour costs
Where are you most susceptible to cost escalation?
Source KPMG International Embracing change?
Global Construction Survey 2008
- respondents could answer more than one option
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The inability to price for increasing costs could
spell disaster for a contractor
What proportion of contracts signed in the past
year had cost escalation clauses?
Source KPMG International Embracing change?
Global Construction Survey 2008
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• Global credit markets the sub-prime hangover
• Skills shortages
• Escalating costs
• Guarantee capacity

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Guarantee capacity will be stretched and
alternate strategies are needed
Guarantee requirements (2007 to 2010) Rbn

• The industry will require double the amount of
  guarantees in 3 years time given the sheer size
  of infrastructure spend both by government and
  the private sector.

Source Absa Construction Infrastructure
estimates
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• Macro backdrop
• Project and programme management
• Challenges in the industry
• Absa in this industry
• Conclusion

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We deliver a full product suite focused on
construction industry players needs

• Portfolio solution to the construction industry
• Relationship-based banking model, backed by
  industry specialisation and industry-specific
  value propositions

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Presentation outline

• Macro backdrop
• Project and programme management
• Challenges in the industry
• Absa in this industry
• Conclusion

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Conclusions

• Market conditions in the infrastructure economy
  have seldom been better
• Shortages and capacity challenges are arising and
  will probably intensify
• Market forces are probably doing us some favours
• Slowing building activity
• Credit markets
• There are challenges, but the resilience of the
  industry is proven
• There is reason for continued optimism
• Absa is focusing a concerted effort on growing
  its presence in this market

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• Questions?

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Please direct your enquiries to
Absa Corporate Business Bank
Ground Floor, Simgos House 162 Anderson
Street Johannesburg 2001 South Africa Tel. 27
(0) 11 350 9727 Fax [phone] E-mail
construction_at_absa.co.za Peter Steyn Clyde
Oakes Charles Russell Pinto Makgopela Maureen
Mabelane