Kindly accept my sincerest gratitude for the opportunity to share with you this afternoon some thoughts on the kind of social contract we need to craft between government, the private sector and other economic actors in order to deliver an efficient infrastructure programme.
I would further like to hasten to commend KPMG for conceiving of and organizing this dialogue when the global community is pondering on the best policy mix that will accelerate global economic recovery and job creation.
I am sure that this situation has both negatively impacted the construction industry and caused it great anxieties as construction slowed down in many countries.
In our own country, which already had had very high unemployment figures even before the global financial meltdown of 2008, whilst a number of factors shielded our economy from the worst effects of the recession, including the macro-economic policies and the 2010 Soccer World Cup infrastructure drive, however our economy, due to its integration into global markets could not be spared the slowdown which saw job losses resulting in an increase in unemployment.
The announcement by President Zuma that government intended spending trillions of rand expanding infrastructure capacity, focusing more on integrated and coordinated infrastructure implementation and particularly on creating new infrastructure, has sent the hope that we can, on the back of this integrated programme, restore our economy to robust growth levels and thus create jobs, develop much-needed skills and industrialise our economy.
Over the last three years, we have seen public sector spending rise, especially in relation to public infrastructure investments, led by large investments in power stations, rail, ports and pipelines capacity, roads, water and dams and municipal and social infrastructure.
These counter-cyclical investments have ensured that we can absorb the worst effects of the slowdown, even though our economy remained mired in a deep crisis from which it can recover.
By the end of this Administration’s term of office, R1 trillion will have been spent on infrastructure expansion.
Surely, today, South Africa is a better place than it was 19 years ago at the advent of the new democratic dispensation.
Just in the next seven years, given the massive infrastructure programme we are implementing:
- an additional 11 719 MW will have been added into the electricity system and 6596 km of transmission network installed to support security of supply;
- existing logistics corridors will be expanded upon and new corridors will have been established, and 1317 new locomotives and 25 000 new wagons will have been procured, in a manner that puts in place a world-class, export-oriented, rail manufacturing sector;
- 6 405 km of rail will have been replaced for the general freight, coal and ore lines, increasing the rail network capacity by 149.7 million tons; and
- 13 125 km of fibre optic cable would have been refurbished and strengthened to ensure carrier grade status and our broadband network would have been expanded to include metros and underserviced areas.
Ladies and Gentlemen:
Despite the steadily improving global financial conditions and reduced short-term risks, the world economy continues to expand at a subdued pace.
After a marked downturn over the past two years, global economic activity is expected to slowly gain momentum in the second half of 2013 and 2014 on the back of accommodative monetary policies in developed and developing economies.
Most world regions are likely to see a moderate pick-up in activity, but growth will continue to be below potential and employment gains, especially in developed economies, will remain weak at best.
The short-term risks associated with the situation in the euro area, the United States shutdown and the economic slowdown in large developing countries have diminished, but not disappeared.
At the same time, new medium-term risks have emerged, including the possible adverse effects of unconventional monetary measures in developed economies on global financial stability.
These risks have the potential to once again derail the feeble recovery of the world economy.
The challenge for developing economies which have been the main drivers of global economic recovery is both to accelerate their industrialisation, diversification and infrastructure development efforts, on the one hand, and, on the other, to accelerate the regional economic integration efforts as well as increase in trade among the developing economies themselves.
As well as industrialisation, diversification and infrastructure expansion, the lesson from the global economic slowdown for many developing economies such as ours, with stronger links with the developed economies, is that we need to accelerate our economic integration in Africa, drastically to expand intra-African trade, and explore new market destinations for our products among emerging markets.
South Africa’s future lies deeply in Africa; Africa is the future and the future is African!
I am pleased to hear that Africa is the area that most global companies intend expanding into and Africa will never overcome its economic development constraints if partners like construction are shunning it.
The main priority for us as policy makers worldwide should therefore be to support a robust and balanced global recovery, with a focus on promoting job creation and lift out poor households from poverty.
The US shutdown presents a compelling case for improved international policy coordination to mitigate negative policy spill-overs, promote cooperation in reforming the international financial system, and ensure sufficient resource flows to developing economies, and in particular the least developed countries.
The construction industry is a natural partner for the developing countries in stimulating the supply and demand sides of the economy.
This is a sector that contributes immensely in improving access to capital from financial markets.
As economies globally recover from prolonged recession, new infrastructure projects are starting to emerge with increased funding available to maintain and build new infrastructure, particularly focusing on energy and other infrastructure that will lead to the diversification of the economy.
However, the profit margins will remain moderate and many companies will be compelled to apply different strategies to secure new infrastructure projects, which, I hope exclude retrenchments.
As the South African government we consider the construction sector as part of our economic fibre which assists us to meet our economic and social objectives.
We are committed to its success as it constitutes a significant portion of both the gross national product and of employment.
In this financial year, the construction sector contribution to our GDP grew from R4bn to R31bn.
While construction’s direct contributions to development are significant, it also stimulates a sizeable amount of economic growth through backward and forward linkages.
As the economy we have not had strong backward linkages due to various reasons, amongst which has been the moderate economic co-ordination.
Infrastructure and construction activity in South Africa has largely been driven by the government’s infrastructure investment programme.
The government’s spending priorities over the past few years have included infrastructure investments to support industrial development through ensuring that adequate social and economic infrastructure is in place and as a means of creating jobs.
The development of road infrastructure in rural areas linking them to cities has boosted economic activities in agricultural products as the cost of transportation of agricultural products has declined, which is in line with South Africa government policy priority of providing social and economic infrastructure designed to bring relief to impoverished communities whose survival is dependent on the agricultural sector or rely on social safety net.
The question is, what note will the sector choose to play in relation to this infrastructure programme: that is, will you partner or profiteer!
The sector must think carefully of the role it will choose to play as this will determine whether the construction industry in South Africa will play a developmental role or a narrow parasitic role that rates profits above everything else, important as these are for the private sector shareholders.
The posture the sector will take and role it will choose to play will play a critical role in whether our economy can industrialise and thus diversify, develop new supplier sectors among blacks and female stakeholders and thus help to create jobs and skills, and accordingly spread wealth and expand the frontiers of opportunity and inclusive growth.
I wish to hasten to say, before my views are misconstrued, that being a partner is not exclusive of making profits.
However, South Africa will miss out on the opportunities of the infrastructure programme if all that this programme entailed was the state investing in infrastructure expansion and the private sector taking in the profits, by any means necessary.
That is why the Department of Public Enterprises had adopted a new vision in 2011 that entailed fostering efficiencies, productivity and transformation in the State-Owned Companies (SOC), their customers and suppliers in order to create jobs, develop skills and drive industrialisation.
Through this public sector investment, we have achieved several multiplier-effects in the form of enterprise development opportunities, skills transfer and the development of new suppliers in the construction supply chain.
Accordingly as the industrialisation objective is at the heart of the infrastructure plan, companies are encouraged to also use local producers for their work as the private sector.
The robust growth and development as envisaged in the National Development Plan can only be realised if we take these drastic and bold measures.
The construction sector is very large, diverse and complex; its size and complexity is further complicated by the vast number and range of employees in the sector as well as and the significant differences in the size and nature of its member organisations.
It is therefore not so easy to achieve and sustain radical improvements in such a diverse an industry as the construction sector.
But, we must do so to secure our future.
The South African construction industry is confronted with major delivery challenges which are noted in the global survey, flagged as backlog in the delivery.
The delays and disruptions, poor site management, time and cost variations, skills and competence issues, lack of quality improvement processes, and lack of worker participation are among the challenges faced in the course of executing construction projects and there is no doubt that substantial improvements in quality and efficiency are needed and are possible.
I would like further to emphasize the importance of investing in human capital in order to attain improved construction quality.
Numerous indications highlight the acute shortages of trained artisans and first level supervisory staff, which clearly impact on the demands for quality control, standard operating procedures, training, and so on.
The shortage of these skills is further exacerbated by the aging profile of artisans in South Africa, the average age of whom is reportedly around 55 years old.
This shows the danger that most of the people available to transfer skills are getting older and older and there will not be sufficient mentoring for the future generations.
Whilst many of the larger contractors are implementing programmes to address their skills requirements, smaller contractors, and in particular new entrants, generally do not have the resources necessary to address these quality factors – which points towards the need for public and private sector interventions to facilitate skills development at a broad level and within contractor development organisations.
In this regard, the Presidential Infrastructure Coordinating Commission (PICC) has developed a key scarce skills list and the private sector, particularly the construction industry, must more actively and robustly partner so that we can expand our skills base and even train more than the sector itself requires.
You are probably aware that KPMG is launching its Global Construction Survey 2013 under the dark cloud of the dubious activities of the industry leaving us as policy makers to question the integrity of the sector and its leadership.
The recent exposure of anti-competitive behaviour through cartels imposes an economic and social cost to South Africa and many developing countries.
Such conduct is unacceptable because it undermines the benefits to the clients of receiving competitively priced bids.
The anti-competitive effect of such behaviour in the construction industry not only hampers the development of the South African economy as a whole but also impedes the employment creation imperatives of government in general.
This therefore requires that there be a review of such public sector procurement processes and active steps are taken by public institutions to minimize the risk of collusive tendering in their procurement processes.
As you can glean, this story is not over yet; a reparation process is needed.
The state has suffered damages that extend beyond the penalties; we need to deal with the fact that the state has overpaid.
The sector must atone.
Because South Africa is a small economy, with a limited number of general contractors who are capable of managing very large projects in the construction sector, this makes the sector very prone to competition law infringements.
But that does not legitimize collusive activities.
Furthermore, transportation costs and safety or environmental standards may constitute formidable entry barriers in some construction markets.
Obviously, limited competition and substantial entry barriers can, in turn, facilitate many different types of anticompetitive conduct, which creates an important need for smaller construction companies to grow in order to counter this.
The formation of construction industry development agencies in the Southern African countries, with a regional initiative to co-ordinate efforts and pool resources where necessary and to address problems and challenges faced by the construction industry, is encouraging.
I am encouraged by the South African respondents in the survey who express optimism based on the increase of projects in their order books for the year 2013.
Among other challenges, those posed by the regulatory environment are close to solution once the Infrastructure Bill is adopted to provide clarity and certainty on a number of areas.
It would be amiss of me not to share this observation that whilst the Global Construction Survey focused on subjective sector interests, that is, the industry prospects, it placed very minimal focus on associate market failures of the sector which include price collusion, reliance on imported goods and skills as well as how to correct project delivery related anomalies.
I am looking forward to engage with the sector further. Thank you.
