Chris Charlton – Consort
The South African construction market has been under pressure since 2009, having peaked in 2009 in the run up to the 2010 World Cup, the sector, as a whole, has been in decline since 2017 and in 2020, it literally fell off the cliff. Decreased government spending, margins under pressure, increasing materials costs and low investor confidence have all contributed to a stagnant construction market.
A healthy construction sector is vital to a well functioning economy. Aside from developing infrastructure that would drive economic growth, the construction sector provides 1.3 million much needed jobs in South Africa. In 2020, the construction sector shed between 120 000 and 140 000 of these jobs and contracted by a record 20.3%. The contraction was driven by the hard lockdown restrictions, during which the construction sector was not deemed to be an essential service. This resulted in construction activity grinding to a halt for April and May 2020. Government and Public sector spending on infrastructure dropped by 1.6% and 27.3% respectively whilst Private Sector spending dropped by 26.1% for the period. This resulted in a total drop in spending to R345bn from R414bn in 2019.
Recent media reports have indicated that the fallout has bottomed out and there should be a recovery in the sector during the course of 2021, albeit quite minimal. The bounce back is said to be limited to single digit growth and far from what is needed coming off a record low base. The construction sector initially has had to play catch up to account for the ceased activities during the 2020 lockdown. From an insurance perspective, this has resulted in numerous extensions of cover for projects not completed as anticipated.
In an attempt to revive the economy, the Government has announced a major spending drive on Infrastructure Development with 51 projects being earmarked as strategic and fast tracked to implementation. The South African Roads Agency is one department that has started awarding contracts with a noticeable uptick in activity in this sector. The total planned spend that the Government has indicated is nearly R 800bn and will likely give the construction sector and by default the economy the much needed boost it requires. This points to the need for Engineering Insurers to position themselves and make sufficient capacity available to account for the increased activity. Government, however, have made similar announcements in the past with little to no immediate action. Engineering Insurers therefore need to prepare cautiously and focus on key growth areas that will likely emerge before the general market recovers.
Renewable Energy is set to be a key growth area that will drive the recovery of the construction sector. In the recently released Integrated Resource Plan, the Government has increased their expectation of the role of renewable energy’s contribution to the overall power supply. Renewables are set to contribute nearly 25% of the overall energy mix by 2030. In addition to governments increased expectations, and due mainly to the current unreliable electricity supply, the private sector has also started to invest heavily in commercial alternative energy supply such as solar. In response to this shift, Consort has put together a Comprehensive Energy Insurance product catering for energy projects ranging from commercial grade right up to utility scale projects. There has been good uptake and we expect to see this continue for the medium term.
Looking further abroad, the rest of Africa has seen small pockets of growth in the construction space. Despite the need for development, activity has been somewhat subdued. There have been a few South African construction entities that have ventured north in an attempt to ride out the depressed local market, but with little general success. Local legislation in the various regions also dictates the insurance requirements and the need to utilize local capacity before foreign insurers can get involved. This would then prevent local engineering insurers from getting too involved in projects on the wider continent. In the case where an opportunity does present itself and the need for capacity is established, the expertise contained in the South African insurance market are well positioned and utilized.
Overall, the Engineering Insurance market has been resilient through a prolonged tough environment. The market has benefitted from the private sector spend whilst the public sector spend has been delayed. This has positioned the market well for the anticipated construction sector recovery as the market has had the time to hone their skill and make their product offering more efficient and fit for purpose. The engineering insurance space will, as with the broader insurance market, benefit from the advancement of technology in understanding the risk mitigation needs of their clients and by providing relevant products to a changing market. There is much to be optimistic about in the South African Engineering Insurance sector and we as Consort look forward to a rapid and sustained recovery of the South African Construction sector.