INFRASTRUCTURE

Constructing Africa

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The construction industry plays a pivotal role in infrastructure development, which ultimately leads to economic growth. We talk to three experts in the construction industry about the current landscape and the future of a built Africa.

Taking a closer look at the current landscape of African infrastructure investments, it is largely focused on short- to medium-term political gain rather than addressing the long term requirements. To this end most projects have a very short delivery time and deals more with local needs rather than regional needs. Projects are largely implemented in isolation.

The African economy has undergone fundamental changes over the last decade. Growth in investor interest is driven by strong economic growth, rising foreign exchange reserves, quality and cost competitiveness and encouraging government policy-making. The strong level of economic growth achieved in Africa in recent years has led to an expansion of industry, commerce and per capita income. This in turn has fuelled demand for infrastructure services including energy, transportation, ICT, water supply, growing agriculture and urban infrastructure.

Quintin Booysen, PMSA Marketing and Sales Manager, is positive about the future of the industry. “The future looks good. Companies can turn the lack of infrastructure into an opportunity. One company that has done this with remarkable success is Dangote.”

Dangote saw a need for cement supply into Africa and rather than waiting for the demand to improve he moved forward with a strategy of reducing high cost manufacturing centres as well as areas where cement imports were dominating. Today Dangote is a major player in the market and has helped drive down cement costs and increased supply across several African counties including South Africa. “With his new technology it is able to rescue production costs and pass the lower costs onto the consumers,” he says.

Musa Shangase, Commercial Director for Corobrik, disagrees, saying that African Development Bank President, Akinwumi Adesina, recently reported that if they don’t fix Africa’s infrastructure financing gap—which they put at some US $60-70 billion a year—they will continue to take two percentage points off Africa’s annual growth rates.

“That itself tells us that the future does not look good,” Shangase says.

Commenting on the greatest challenges to overcome when it comes to infrastructure investments on the African continent, Frans Pienaar, Chairman of Inyatsi Construction, says capacity within government bodies and implementing agencies limit the vision and the rate at which infrastructure development can take place.

“In most of our markets across sub Saharan Africa many appointments of officials in implementing agencies is politically motivated and not always as focused on the skills requirement as it should be,” he says.

This limits the effectiveness and visionary implementation of infrastructure for the future.

“In some markets there are exceptions and we find that these markets are usually also attracting the most political attack from the public, the press and the political enemies of the government of the day. So when widespread aggressive infrastructure projects get underway, petty politics often takes over trying to force the authorities to focus on smaller, more localised and short-term issues.

“The macro view is then cast aside for short-term political gain on the low hanging fruit of dealing with short term issue rather than the real issues at hand,” according to Shangase.

Booysen adds by saying that finance is always an issue and that the continent needs the infrastructure to grow, however without the growth few investors are willing to invest. “It is a chicken and egg situation; does investment flow first to create infrastructure for growth or does the infrastructure projects create the growth required and therefore allow more development to take place on the continent?”

According to Shangase, the greatest challenges to overcome when it comes to infrastructure investment in Africa, is energy. With 650 million Africans without electricity, the continent has to power up and light Africa.

Pienaar says from an investment point of view, to ensure a sustainable future of the construction industry, both client bodies and funding agencies should shift more towards turnkey type products where procurement is done through a one stop shop rather than feeding a host of consultants.

“Let the control and responsibility lie with the entities that has the ability to manage the risks best. Contractors should be given a wider mandate, but also a larger responsibility and accountability. With complex and diverse teams of clients, consultants, contractors and sub-contractors, there is too much room for blame shifting and nobody takes responsibility. The client is exposed and with a lack of capacity they are exposing the client bodies to massive contractual claims and escalation,” he told Opportunity.

Booysen on the other hand says we need more affordable raw materials and access to raw materials. This includes manufacturing primary materials such as cement, bricks, blocks and concrete at affordable prices to lower total construction costs and growing the middle class by having more affordable construction rolling out across the continent. Skills are also required to ensure higher productivity and better usage of materials.

Shangase says the future of Africa lies in Africa and the African Union should use Africa’s resources and African markets to sustain the future of the construction industry in the continent.

As to what can African governments can do to boost foreign investment in the continent as far as construction goes, Booysen suggests that a friendlier tax programme for foreigner’s investing in large capital projects will boost FDI. “Government should ensure more skills development, which will allow new entrants access to a skilled workforce, rather than Africa being only a labour pool.

Africa should create a skilled workforce that can assist in the rollout of projects through human capital rather than sweat equity by way of labour only,” says Booysen.

According to Pienaar: “Governments should rely more on the skills available in the industry and ensure that the most efficient solution is provided with proper accountability. They can reward business for delivering on time and within budget and penalise entities that abuse the system. Government should fulfil their role as administrator and allow business to implement. This will create credibility with funding agencies and investors.”

Shangase’s solution to governments boosting foreign investment, is that governments on the continent should come up with an integrated plan to accommodate the market.

He says this will help Africa’s long-term growth to increasingly reflect interrelated social and demographic changes, creating new domestic engines of growth. Key among these will be urbanisation, an expanding labour force, and the rise of the middle-class African consumer.

“In 1980, just 28% of Africans lived in cities. Today, over 40% of the continent’s one billion people do—a proportion roughly comparable to China and larger than India. By 2030, that share is projected to rise to 50%, and Africa’s top 18 cities will have a combined spending power of $1.3 trillion,” says Shangase.

Booysen told Opportunity that there is not enough foreign direct investment (FDI) happening on the continent (and in South Africa).

“Africa is being throttled for whatever reason. Some governments create uncertainty by not having clear policies and this is a deterrent for FDI. What we need to create is more in-country investment. We cannot wait for FDI. Africa needs to move forward and start building its own mega projects. This can be achieved through efficient public offerings when the citizens of the country and willing investors can invest in new projects, companies and business ideas that can create equity wealth on the continent. There are also group funding projects or crowd funding when citizens and corporations can invest in ideas across the continent and become wealthy through equity ownership and success on new projects.” He says companies like Dangote are an example of not being hindered by waiting for funding. They rather generated their equity on the continent and moved forward through a solid business strategy that investors want to be part of.

“Governments across Africa interfere in everything and frustrate business, investors and funding agencies alike. Of course governments have a role to play, but should stay in their space and should not try and control something it does not have the capacity, competence or experience to do. Government’s interference creates opportunity for corruption and opportunism to have obstacles ‘managed’. A very small fraction of the money invested in infrastructure actually gets spent on what it is meant for.

“A typical project will go through feasibility concept design, preliminary design, final design, design review, tender, tender review, external supervision appointment and then, maybe, construction. This should be a single process with accountability required from the entity receiving the money. If governments, funding agencies and investors would just ask, business can manage this whole process and do it cheaper, faster, more efficient and actually get it done,” says Pienaar.

Shangase adds that the only foreign investment that is visible in the continent is from China and, he says, it does not create enough economic growth, because China uses its own resources, both human and material.

Yet the big question remains: Is South Africa properly aligned for massive future foreign investment in infrastructure?

According to Pienaar, South Africa is definitely in a position to receive massive FDI in infrastructure, but the chaos because of a lack of capacity and the self-interest limits the ability to roll out the projects at the required rate. “We have heard about a massive infrastructure spend coming from Government but have seen very little of it. This is purely because of Government trying to be in control of every step and failing to do so because they do not have the capacity.”

Looking at how Africa infrastructure investments will boost business in South Africa and the sectors that will be most affected, Pienaar is of the opinion that, as the biggest economy in Africa, South Africa will benefit from most infrastructure investment in Africa. He says the manufacturing sector is in the best position to benefit. The construction industry has already realised that good returns are possible in the rest of the world with less risk and less government interference. “We believe that this will provide opportunities for construction companies with a focus on being leaders in the industry across Africa. That is why at Inyatsi we want to be the preferred African construction partner. We do not believe in mercenary tactics of ‘one hit wonder’ type projects but we base our business model on relationships and taking a long-term view on any client engagement.”

Pienaar says when one looks at where South Africa is falling short when it comes to infrastructure development, there is a fundamental lack of true transformation and unless the industry changes its mind set about the issues at hand, we will just keep on losing skills and capacity and set ourselves up to be abused by foreign entities that operate with short-term agendas.

In this regard, Booysen refers to the new ZENDAI project in Modderfontein, which he says will give a much needed boost to local building contractors. “This development is being spearheaded by Chinese investors and so far has been well embraced—with the first few developments taking off as part of a much larger mega city as part of a 20-year plan.”Another important issue affecting the construction industry and infrastructure development on the continent is the fact that a number of the largest South African construction companies are currently reporting that the majority of their income is generated outside our borders. This has serious implications for South Africa’s economy. Pienaar says, for a start, this is a law of nature, as anything follows the path of least resistance.“Whilst Government interferes and is driven by self-interest, the larger players in the market are positioning themselves to be able to just quietly slip out the back door. Their hearts are not in it. When window dressing stops working, they will sell their local entities to ‘so called’ empowerment partners and walk off into the sunset. We saw it with Billiton, Anglo American and De Beers to mention but a few. Already we see Murray and Roberts changing their tune ever so slightly with the closing of the companies that started their business decades ago. Perhaps these businesses had it ‘their own way’ for so long that this is the only way they can adapt to a changing environment.”

Although Booysen is positive that South Africa has the skills to be competitive as well as the technology to supply world class infrastructure design, development and rollout, he says unfortunately there is not a big enough market currently in South Africa and our construction companies now need to look abroad to find work.

The implications of this on the building industry in is that we have lost, and will lose massive amounts of skills at corporate and management level. Pienaar says these are world class companies with great teams that are now creating opportunities for their teams abroad.

“We will loose them and they will not be back. I am sure that large political factions will say: ‘Good riddance’. However, the lasting effect will be job losses in the lower echelons and those jobs will not come back. Foreign players from China and Europe will export these jobs to their countries because they can access the political game at a different level. The money spent on infrastructure projects will flow out of the country and enrich the foreign entities. This is already visible in many of our markets across Africa.”

Booysen agrees, and adds that although we are losing our special skills to foreign projects, at least we are keeping people employed and when the projects come back to South Africa, we would not have lost our skills permanently.

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