By Thokozile Mahlangu is the Chief Executive Officer of the Insurance Institute of South Africa
The government’s plans to spend close to one trillion rand on infrastructure projects in the transport and logistics sectors over the next three years, bodes well for South Africa’s construction industry, however, there are concerns that current economic pressures could result in lower quality standards on capital build projects, thus increasing risk.
In February this year, President Cyril Ramaphosa and Finance Minister Enoch Godongwana outlined the government’s envisioned R903 billion rand spend on transport- and logistics-related projects, during the State of the Nation Address and tabling of the national budget, respectively.
Among others, the projects include the improvement of the national road network, the construction of bridges, water and sanitation infrastructure upgrades and expansion, among others. The government has been criticised in the past for underspending on infrastructure, and it is hoped that this latest capital injection into the much ailing construction industry will help stimulate a real recovery.
A Research and Markets report, South Africa Construction Industry Report 2023, forecasts that the construction industry in South Africa is expected to grow by 5% to reach R232 billion this year, with steady growth expected over all four quarters of 2023.
However, this growth would be off a low base, as the sector tries to rebound from the devastating blow of the COVID-19 pandemic that saw government cut infrastructure spend by 80% and practically all construction activity grind to halt under lockdown.
The post-pandemic economic climate has been no kinder to construction, with many companies cutting capex by between 50% and 60% to survive, also slashing jobs and reducing work hours. This has resulted in a skills shortage which is likely to be compounded by a skills exodus due to political and economic uncertainty.
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In addition, construction companies are seeing their profit margins further squeezed under the pressure from high interest rates, spiralling material, labour, energy and transport costs, forcing them to deliver successful projects with limited resources.
Considering these factors, there is a danger that lower quality standards are likely to plague construction projects going forward. Many construction projects experience non-conformance to quality requirements, as well as cost and schedule overruns. This naturally increases risk and insurance companies must have a good understanding of this new threat landscape.
Lower standards invariably lead to expensive rework, as well as budget and deadline overruns, that can incur sizeable fines and penalties that could potentially wipe out a construction company’s profit margin and even result in additional costs.
The rising risks of insolvency and the increasing cost of claims are thus placing pressure on insurance premiums and prompting to insurers to find ways to limit their claims exposure. It is important that all risks are carefully considered whether financial, contractual, operational or environmental and can be caused by both internal and external sources.
What is needed is a discussion and understanding between a professional broker, that specialises in construction risk, and the contactor, to anticipate any changes in policy wording, terms and conditions, pricing, and potential exclusions to maintain a workable and affordable level of cover.
Insurance plays a vital role as a risk mitigation tool in construction projects, whether cover is taken out due to statutory, regulatory, or contractual requirements, or an additional measure of protection. It is crucial that every party participating in a construction project is aware of the risks involved and manages them to mitigate any potential liability.
Construction companies must also be aware that when planning a construction project, insurance and risk management are crucial components that need to be factored into the planning stages and these costs must form part of the construction budget.
The government’s largescale infrastructure build programme should finally result in at least a partial recovery of the construction industry as work on major projects commences over the next three years. As activity starts to pick up, all construction projects will need to be undertaken with a clear understanding of the risks that each one will face.