The construction industry and economic growth in

South AfricaP Blaauw

GDP Multipliers

Sector Direct Indirect Induced

Building (1.2040)

0.4934 0.3055 0.4051

Civil (1.1807)

0.5203 0.2708 0.3896

Agriculture (1.1704)

0.6774 0.1682 0.3247

Source: IDCFor every R1 increase in final demand

Employment Multipliers

Sector Direct Indirect Induced

Building (11.87)

5.32 3.5 3.03

Civil

(10.82)

5.24 2.39 3.18

Agriculture (24.17)

18.86 2.23 3.08

Source: ConningarthPeople Per Million

Construction Facts

Total Employment: +-500 000

Residential, Non Residential and Construction Works – 6.3% of GDP

Total annual turnover R60 bill – R70 bill

Material Supplied R21.5 bill plus

Machinery Equipment R12 bill plus

Contributions

2005

Gen Gov.

Publ.

Corp.

Private Sector

Residential 7.38% 0.02% 92.6%

Non-Residential 37.2% 6.24% 56.56%

Construction Works 44% 39% 17%

Source: SARB

INVESTMENT IN TOTAL HOUSING AT CONSTANT 2006 PRICES

0

5

10

15

20

25

30

35

40

45

46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Source: SARB; MFA DATABASE

RA

ND

BIL

LIO

N

LONG TERMGROWTH 1.84% pa

INVESTMENT IN TOTAL NON-RESIDENTIAL BUILDINGS AT CONSTANT 2006 PRICES

0

10

20

30

40

50

60

46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Source: SARB; MFA DATABASE

RA

ND

BIL

LIO

N

LONG TERMGROWTH2,44% pa

THE DEGREE OF COMPETITION IN TENDERING BUILDING CONTRACTORS

0

10

20

30

40

50

60

70

80

90

100

| 72 | 77 | 82 | 87 | 92 | 97 | 02 | 07Source: BER; MFA DATABASE

LES

S K

EE

N <

50%

> V

ER

Y K

EE

N

Examining the relationship between Economic Growth and

Infrastructure spend

Economic Growth

Demand

Supply

No examples of developing countries that have sustained high economic growth on the basis of a consumption led-boom

•Low interest rate

•Low inflation

•Strong fiscal position

•High corporate tax rate

•Skill Constraints

•Expensive logistical costs

•High input costs

Economic Infrastructure Stock/GDP Ratio and Construction Works (2000=100)

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004

RA

TIO

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Mill

ion

RATIO CW

% Points difference GDP/Capital Stock growth

-3

-2

-1

0

1

2

3

4

60 65 70 75 80 85 90 95 20

Years

Per

cen

tag

e (%

)

5 year moving average

Public-sector economic infrastructure investment (gross) and depreciation

0

6

12

18

24

30

36

1960 1970 1980 1990 2000

R b

illio

n, 1

995

pric

es

Infrastructure investment Depreciation

P Perkins

Paved national and provincial roads, passenger vehicles,and commercial vehicles for transport of goods

0

100

200

300

400

500

1940 1950 1960 1970 1980 1990 2000

Inde

x (1

970

= 10

0)

Paved roads Passenger vehicles Goods vehicles

P Perkins

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

GDP CONS

Political Stability

Sustained Growth

Infrastructure Backlogs

Healthy Budget

What Investment ?“The capacity for economic infrastructure to reduce costs associated with production and delivery and increase the competitiveness of South African business suggests a positive relationship between expansion in infrastructure and economic growth. In fact neglecting infrastructure investment could compromise long-term economic growth.”

P Perkins

Economic Infrastructure:

•Transport

•Communication

•Power

•Water and sanitation

Capital/Infrastructure

0

10000

20000

30000

40000

50000

60000

70000

Previous MTEF Current MTEF

Mill

ion

Water Sanitation Electricity Housing Education Health Roads Rail Ports Courts Police Infrastructure Prisons

96%

120%

76%

Transnet’s five year gross capital investment budget

12,015,3

11,414,7 11,1

64,5

53,3

41,4

26,7

11,4

0

10

20

30

40

50

60

70

2006/2007 2007/2008 2008/2009 2009/2010 2010/2011

Rbn

Financial years

Capacity Project Funnel

Build1000

800

1775

165

Feasibility, Business

Case, Contract

Concluding

Pre-feasibility

ResearchOpportunity

Identification

PBMR

Echo

1128

Grootvlei

1520

Camden300

Arnot P1&P2

November

600

Juliett

Oscar

6000

Mike

1000

Lima

1332

600

India

Romeo

1600

Sierra

1027

OCGT

1600

*Papa

1300

Kilo

Golf

Bravo

906

KomatiUCG

17375 MW 7800 MW 20850 MW

1050

Quebec

800

Tango

90

112

4000Concentrating Solar

100

Version: 26 April 2006

- Coal

W - Hydro

- Nuclear

- Gas

- Coal- Coal

- Hydro

- Nuclear

- Gas

- Coal

Solar-

Whiskey

500

Transmission-

Songo ApolloHVDC Link Capacity Upgrade

* Possible 2400MW Mid Merit

Trans KalahariInterconnector

0

0

Discard Coal

0

New Coal Supply

0

90

1546

90

1800

Uniform

1200

Victor

500

Rainbow Millenium

2000

X-ray

1775

3500

Zulu 2100

Delta

Charlie

2400

4200

500

Yankee

800

1000

2115

Alpha

Hotel

1332

4200

Foxtrot

4200

765kV CapeStrengthening

0

8328 MW

Growth in population vs Stock of Social infrastructure (06 = estimates)

-4

-3

-2

-1

0

1

2

85 90 95 0 5

Perc

enta

ge P

oint

EX SARB and ASSA

It has startedConstruction Works Scenario

2000=100

0

5

10

15

20

25

30

35

40

45

60 63 66 69 72 75 78 81 84 87 90 93 96 99 2 5 8 11 14 17 20B

illio

n

Optimistic Pesimistic Reality

Infrastructure Real Contribution

Not normally initiator of investment, but facilitator of investment.

Addressing the Supply Side Providing the fixed assets needed

to expand capacity and lower costs of doing business.

Investment only real contributor to new employment opportunities

Prospects & Challenges

Success FactorSocio Economic StabilityContinued commitment to investment

–Fiscal Health (sustainability)Efficiency (Institutional Capacity)Economic Growth

CONSTRUCTION WORKS FORECAST

10

20

30

40

50

60

70

60 65 70 75 80 85 90 95 0 5 10 15

Ran

d B

illio

n (

2005

= 1

00)

IMPLICATIONS OF VIGOROUS GROWTH

CHANGING YOUR MINDSET –Clients and Contractors

SUPPLY CHAIN CONSTRAINTS PEOPLE: THE KEY; HAVE STRATEGIES TO:

• KEEP WHAT YOU HAVE; THEY ARE GOLD

• DEVELOP ALL POTENTIAL

• CHANGE/FIND THE STARS AND INVEST IN THEM

MATERIAL

EQUITY/TRANSFORMATION CHARTER

70 73 76 79 82 85 88 91 94 97 0-20

-10

0

10

20

CH

AN

GE

(%

)

OUTPUTLAB INPUTLAB PROD

CHANGES: OUTPUT, LABOUR INPUT, PRODUCTIVITY

Key Risk Issues in effective infrastructure project structuring

Low Risk High Risk

Payment

Design Development

Schedule

Status of Partner

Low Bidding

Client Management

Portfolio Risk

Project Development

Growth & Expansion

Risk vs. Reward

Contract Models

Qualified Resources - skills

Risk Management Process

Change Management

Source: ECRI

Training and EducationCurrent trends and requirements for technical skills to cater for growth

-12500

-10000

-7500

-5000

-2500

0

2500

5000

7500

10000

12500

15000

17500

20000

22500

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Retirement

Early retirement

Emigration

Loss due to premature death

Leaving the industry

Immigrants

National Diploma graduate

BSc/BEng graduate

In industry from 2004

EX Allyson Lawless

Civil Engineering – Engineers & Technologists

0 50 100 150 200 250 300

24

29

34

39

44

49

54

59

64

69

Ag

e

Number per age group

BlackWhite

EX Allyson Lawless, June 2004

Dramatic drop in artisan registrations

0

5000

10000

1500064 68 72 76 80 84 88 92 96 00

Civ

il S

pend

ing

R b

n

0

500

1000

1500

2000

Art

isan

s R

egis

tere

d

Civil Spending Building Industry Artisans RegisteredEX Allyson Lawless; Inflation adjusted base 1990

Skills Challenge

CETA lost focus and is struggling to find its way back.

Around 50% of the labour force does not have access to training because of instability, sub-contracting and temporary labour

Specialists are ageing and fall mostly in the +- 50 age bracket.

Construction graduates are lured to other more attractive sectors

Emerging contractors have a limited lifespan due to lacking experience and limited access to finance

Are you experiencing a skills crisis

1.24 2.26

96.20

0.310

20

40

60

80

100

120

Not at all Maybe To some extend A crisis

2006.4

LABOUR & MATERIALS SHORTAGES

0

10

20

30

40

50

60

70

80

90

100

| 72 | 77 | 82 | 87 | 92 | 97 | 02 | 07

Source: BER; MFA DATABASE

LESS

SEV

ERE

BO

TTLE

NEC

KS

/ SEV

ERE

BO

TTLE

NEC

KS

Materials Labour

SHADED AREAS REPRESENT THE UPSWING PHASESIN THE ECONOMY

Regional Cement Demand

17.116.615.9

7.6 8.5 9.1 9.2 9.3 9.6 9.0 9.0 9.2 9.6 10.211.7

13.014.2 15.1

-

2

4

6

8

10

12

14

16

18

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Mt PPC Forecast

Current Industry Capacity (extenders included)

EX PPC

Civil Engineering Turnover (200=100), Inflation (%), Profitability (%)

5

7

9

11

13

15

17

19

21

23

25

68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 2000

2001

2002

2003

2004

2005

2006

Bill

ions

0

2

4

6

8

10

12

14

16

18

20

22

%

Civil Engineering Turnover Profitability Inflation

7.06%6.5%

5.21%

20%

17%

ELEMENT CONTRACTING

OWNERSHIP 10%-14%

SENIOR MANAGEMENT ALL – 6%

Women - 0%

MIDDLE MANAGEMENT ALL -15%

Women – 1%

JUNIOR

MANAGEMENT

ALL – 56%

Women - 2%

Current status of transformation in the contracting industry

EX IMC

Business/Enterprise Development

0

30000

60000

90000

1-5 6-10 11-20 21-30 31-50 51-75 76-100

101-250

251-500

501-1000

1000+

Size category

Nu

mb

er

of sta

ff

Staff in Total of 11441 Black Companies

Staff in Total of 8412 White Companies

Demographic distribution and size of companies in the construction sector

Ex Allyson Lawless

Other ChallengesRegulatory

Great number of public sector clients;

• 6 National departments

• 9 Provincial departments: transport, roads, works

• 240 local authorities,

• a number of public corporations

• In excess of 120 pieces of legislation

• Uncoordinated policies – heterogeneous client base

• Costly to police

Fragmentation

Concluding Remarks

Wonderful OpportunitiesBull Run of PamplonaChange MindsetGROWTH HAS MORE AND

EXCEEDINGLY MORE DIFFICULT DEMANDS THAN CONTRACTIONS

Partnership