The results of Consulting Engineers South Africa's (CESA) Bi-annual Economic and Capacity Survey for the period June to December 2017 recently released indicate that expectations relating to industry confidence levels for the first six months of 2018 are still very positive increasing in the last six months of this year. This despite the slowdown in investment by Government and general economic conditions not facilitating growth in the sector with investment by government showing the biggest decline in 2017 since the financial crisis of 2009/2010.
2018 got off to a relatively good start, with economists and market analysts hailing the win by Cyril Ramaphosa in the ANC’s December elective conference, as well as the eventual resignation of ex-president Jacob Zuma boosting industry confidence indexes in the short term.
“In the December 2015 survey, industry confidence levels fell to its lowest level in 16 years. Since then there has been good improvement with the net satisfaction rate improving to 96.3 percent in the first six months of 2017 and falling significantly to 54.4 percent in the December 2017 survey but are positive for 2018 rising to 92.6 for the last six months of the year. This is despite employment in the industry decreasing by an average of 12 percent in the last six months of 2017, one of the biggest declines since the inception of the survey,” states CESA CEO Chris Campbell.
Gross fixed capital formation (GFCF) fell by 3.9 percent in December of 2017, the third consecutive contraction, following contractions of 2.1 percent and 3.9 percent in the 2nd and 3rd quarters of 2017 respectively. Investment was negatively affected by a slowdown in government investment, as well as general economic conditions not facilitating growth in the sector, although an increase in confidence to some degree. Investment by general government saw the biggest decline in 2017, with a contraction of 5.5 percent y-y, the biggest y-y contraction since the financial crisis in 2009/2010.
GFCF as a percentage of GDP averaged at 9.5 percent in 2017 overall and was 9.3 percent in the 4th quarter. The National Development Plan (NDP) has, what may seem to be a somewhat unachievable target of 30 percent contribution of GFCF to GDP by 2030. All economic indicators currently suggest that investment in relation to GDP is likely to slow over the medium term, due to slower government spending, financial constraints experienced by SOE’s and continued weak private sector confidence.
Campbell cautions that regulation issues, including the procurement of consulting engineering services, remain one of the biggest challenges faced by the industry. Procurement is currently based on price and broad-based black economic empowerment (BBBEE) points, with functionality or quality having a minimum threshold, thus being largely price driven. This is affecting tender prices, as firms sometimes tender below cost in view of the diminished availability of projects. A further challenge to the industry is to find a way to standardize the procurement procedures applied by the different government departments.
“Unlocking greater private sector participation is seen as a critical element to fast track delivery which will support engineering fees and as such engineering development in the industry. Government must create an environment for the private sector to play a much bigger role in infrastructure delivery. Many of the projects highlighted in the NDP can be carried out by the private sector through public-private partnerships”.
Service delivery, especially at municipal level remains a critical burning issue. The consulting engineering industry is threatened by incapacitated local and provincial governments. As major clients to the industry, it is important that these institutions become more effective, more proactive in identifying needs and priorities and more efficient in project implementation and – management.
In the last six months of 2017 fee earnings increased by 2.0 percent compared to the first six months of 2017, which was relatively unchanged compared to the same period in 2016. The increase was better than the expected 0.4 percent increase as reported by firms in the previous survey with regards to the outlook for the last six months of 2017. Larger firms reported an increase of 4.0 percent, while earnings for medium-size firms was 27 percent lower. Smaller firms saw the biggest increase of 17.0 percent, but micro firms saw a decrease of 4.1 percent. Earnings are expected to decrease in the first half of 2018, with all size firms expecting a decrease of some sort.
This remains a serious issue, having a broad-based effect on firms operating in the industry. After having shown some improvement in the December 2015 survey, the percentage of fees outstanding for longer than 90 days as a percentage of total estimated income (including late payments) deteriorated to an average of 25.0 percent in the last six months of 2017. It is estimated that around R6.6bn in earnings is currently outstanding after the 90-day period.
Transformation of the Industry
The appointment of Black executive staff measured by the contribution of Black executive directors, non-executive directors, members and partners as a percentage of total executive staff, increased slightly to 41.5 percent from 37.4 percent and 45.7 percent in the previous two surveys. The appointment of women at an executive level deteriorated to 11.9 percent from 12.8 percent but is still below the 13.6 percent in the June 2016 survey. Of the total women employed in the consulting engineering industry, 2.5 percent were reported at an executive level up from 1.6 percent in the June 2017 survey.
Employment decreased by an average of 12 percent in the last six months of 2017 to an estimated 21,369 employees in the industry, compared to the first six months of 2017, following the 4 percent increase reported in the previous survey. This is one of the biggest declines since the inception of the survey. This represents a decrease of 8.5 percent compared to the same period in 2016. “The number of firms looking for engineers decreased to 51.7 percent from 67.3 percent in the previous survey, with a notable decrease in demand for technicians to 1.9 percent, from 73.4 percent in the previous survey. Demand for other technical staff also decreased markedly to 3.7 percent from 75.1, while demand for technologists decreased to 45.3 percent, from 71.8 percent,” concludes Campbell.