Another hard year for the construction industry

Despite predictions that 2013 will restore some of the local construction sector’s profitability, the situation is as precarious as ever.

The Hawks’ probe into collusion between large construction firms in the tenders for soccer World Cup infrastructure could cause an even deeper fracture in the industry’s relationship with government.

Ethics have come under the spotlight again. Last week Roger Jardine, CEO of Aveng, SA’s largest construction group by market cap, had harsh words for “entrenched collusive behaviour” and a society “plagued with corruption”.

“Collusive and anticompetitive behaviour has left our country with a disgraceful economic and ethical legacy that must be rooted out as a matter of urgency. We need not only the right skills but also the right ethics and values if SA is to thrive and jobs are to be created,” he says.

And it has emerged that executives who engage in price fixing could be criminally prosecuted.

Heather Irvine, head of competition at Norton Rose, says individuals who participate in cartels could face criminal prosecution, even though the provisions in the Competition Amendment Act which criminalise cartel conduct have not yet been signed into law.

The police and prosecuting authority have limited resources and capacity to investigate and prosecute complex corporate crimes of this nature, says Irvine. However, the global trend is towards harsh criminal sentences, as well as big corporate fines for those found guilty.

The probe adds to the misery that has engulfed the sector for about four years, coming at a time when companies are hoping to make a break from the past. Allegations of anticompetitive behaviour have come during a prolonged industry downturn in which problem contracts have burgeoned.

The FNB/BER civil construction index fell from 42 to 36 points during the fourth quarter of 2012. Profitability levels are low and competition is still high. Employment levels, meanwhile, are low.

However, in its most recent state of the industry report, the SA Federation of Civil Engineering Contractors (Safcec) says 2013’s nominal industry turnover is expected to be about R50bn, a 16,5% increase on the 2012 estimate. This is a far cry from the R32,7bn turnover recorded in 2010 and almost at 2008 levels, when the construction sector’s high point of R58bn in turnover was recorded.

The financial results of SA’s large construction firms are expected to show some improvement as a result, even if conditions are far from optimal.

Group Five, under CEO Mike Upton, expects headline EPS to be between 10% and 20% higher during the six months to December.

Aveng, Murray & Roberts and WBHO are all expected to release results for the same period within the next month. Though concerns about problem contracts and late payment or nonpayment are not as pronounced, competition for contracts remains robust.

This has affected margins, which are lower than they have been in the past and are not expected to improve for at least another 12 months.

But the recovery period is set to be dogged by the revelations of collusion. The competition commission’s “fasttrack” settlement process started at the beginning of 2011, but is still not concluded. Most of SA’s firms have applied to the commission for leniency. The Hawks’ investigation, however, could be more revealing, particularly if World Cup stadiums are concerned.

Industry bodies like Safcec and the SA Institute of Civil Engineering have spoken out against collusion. And WBHO has rejected allegations of criminal conduct, even though it is negotiating a settlement with the competition commission.