Mike Winstanley, Head of Engineering at CIB
Construction Industry Overview
Construction, along with many other sectors in South Africa, has experienced incredibly tough times, in recent years however, the entire picture isn’t that bleak.
Macroeconomic challenges such as energy security, inflation, Covid-19 and policy uncertainty have created an environment that has not been conducive to growth, resulting in the construction sector being hit – hard.
Growth in real value added in construction, contracted by 1.5 percent for the first three quarters of 2021, and its contribution to GDP has been negligible for four consecutive quarters. Construction has a high employment multiplier so its persistent mediocre performance will inhibit job creation. Project disruptions due to slow tendering processes, high labour turnover, low productivity and poor skills and behaviour continue to inhibit performance.
I realise the data looks bleak, but I do expect a turnaround in the construction space. I am cautiously optimistic about the government’s commitment to investing in existing and new infrastructure as well as removing red tape allowing more public private partnerships. With elections around the corner, the government now more than ever needs to deliver on what South Africans have been desperate for, which is action and not just words. They cannot be seen to be dragging their heels any longer.
In summary, the sentiment is generally quite positive for 2023 and beyond in the construction space. Although the last three years have been especially difficult with the Covid-19 pandemic supply chain issues, action on project implementation and inflationary pressures, the industry is resilient enough and we believe to see more growth going forward, especially coming off a very low base.
Despite these, I am optimistic about a few sectors in our country. The South African National Roads Agency (SANRAL) continues to excel in road building and management to the extent that the network under its care has improved its condition in recent years while absorbing more of the provincial and regional road network which had helped improve their maintenance greatly.
Major oil and gas pipelines as well as the information and communication networks are in excellent condition. Airports Company South Africa continues to maintain its airports in fair condition, which has assisted in complying with minimum international standards it needs to operate.
Growth is likely to come from renewables and the demand for clean energy
As more governments and people become more aware of the impact of traditional fossil fuels on the environment, the demand for these types of infrastructure projects has ramped up considerably. There are several factors that will drive these projects:
- The Renewable Independent Power Producer Programme (REIPPP) spearheaded by the government. Despite the uncertainty around its implementation, I do believe we will see traction here over the long term.
- New legislation has been gazetted to remove the 100-megawatt licensing threshold which means that solar and wind private power generation projects of any size can be built without a license.
- Increased demand has driven down the costs of renewable energy making it more accessible and affordable.
- South Africa is in desperate need of improved energy security and renewables is a clean way of doing this.
- Our climate lends itself to taking full benefit of these renewables.
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Insurers see the construction of renewable infrastructure as a specialist field of insurance. I foresee insurers cautiously underwriting renewables as they come with their own set of risk exposures. Comprehensive underwriting notes will be important as insurers will need to fully understand the risk at hand before putting terms down. The more information an insurer has upfront will speed up the underwriting process.
It is important to note a recent trend regarding the theft of solar panels in the industry. Solar panels are enormously in demand and insurers may want to limit theft covers considerably on site and in offsite storage facilities. They may also want to impose higher theft deductibles. If higher theft limits are requested, I believe insurers will be charging more premiums and will also ask additional questions about why higher limits are required and what additional security measures will be in place if granted, to mitigate incidents of theft.
Our insurance sector is facing challenges but so are our contractors on the ground
It is important to acknowledge the challenges and pressures construction contractors face in our country. Inflationary pressure and supply chain obstacles have ramped up the cost of materials. In an industry already known for tight timelines and strict budgets, the increased cost of materials has reduced their margins even further.
Contractors are also having to face external pressures, one commonly known as the “construction mafia” who invade construction sites across the country demanding money or a stake in development projects. According to a biz news report from September 2022, a big property developer reported that a heavily armed group occupied a multibillion Rand shopping centre a day before it was scheduled to open. They demanded a 30% cut of the centres income to leave the development in peace. The developer had to deploy a private security firm with its own weapons and helicopters to chase the occupiers off-site.
These contractors are also having to retain these services at a significant cost to prevent the group from returning to the centre much like many contractors have had to.
Our Contractors operate in a difficult environment, and I do believe there is a growing awareness, which may not have been the forefront of the mind, that insurance can play a crucial role in protecting their assets and mitigating losses. This has been driven by the growing costs of construction-related liabilities, increased complexity of construction projects and most definitely an increase in the frequency and severity of natural perils.
It is clear to see how complex and challenging our industry has become, not only in the construction sector but in the insurance sector too. Now more than ever brokers will be needed to play a crucial role in providing sound advice to contractors who are operating in a complex and challenging environment.