Consulting Engineers of South Africa Warns Firms of a Possible Meltdown

The Consulting Engineers of South Africa has issued a warning to local engineering firms that they are in trouble of facing a serious financial lapse due to the sluggish growth of the economy.

Graham Pirie, who is the CEO of CESA, testified that there has also been a significant increase in Mergers and Acquisitions despite the economic splurge bedeviling the country.

“The slowdown in developed economies has resulted in many of them looking for opportunities in Africa as the ‘last frontier’  utilising South Africa, in some cases, as the springboard into the rest of Africa,” said Pirie.

This is inspite of the fact that signs of positive growth in certain African countries such as Botswana and Namibia is overwhelming in terms of low base capital acquisition. 

CESA’s latest Bi-annual Economic and Capacity Survey (BECS) indicates a decline in real fixed income by firms, however, the dichotomy is that the industry is seeing a projected increase in industry confidence as projects are slowly being converted and entering the feasibility design stage.

Tender competition remains keen to fierce but has marginally declined. Due to low industry capacity utilisation the skills shortage has all but disappeared and the majority of firms now have under-utilised engineering skills capacity. Turmoil in the labour market has had a marked effect on industry confidence by private sector clients such as the mining sector.

“The growth rate in our local economy is sluggish at best and the industry is desperate for the long awaited roll out of the Public Sector Infrastructure Programme”, stated Pirie adding that mega projects must be implemented as they were signs of some recovery.

“Although there are some signs that delivery is starting to manifest it is at a very slow rate – recognizing that mega projects do have long lead times. In the domestic environment uncertainty is bedeviling infrastructure rollout with the main impediments being lack of public sector capacity, corruption and the inappropriate methodology for the procurement of professional services in the infrastructure environment,” he continued.

According to figures from CESA, conditions in the first four months of 2012 were more difficult than expected, overall confidence in the industry fell by 14% since the first six months of 2012, from an index level of 81,8 to 70,0 the lowest level since the second half of 2003. Confidence was severely dented by 2012, as expectations simply had not materialized. Expectations are for conditions to improve in the next 12 months, but more so in the second half of 2013 when confidence levels in respect of working conditions are expected to be restored to a level of 82,1. 

The trend has always been for the private sector to follow the public sector with regards to investing in infrastructure and in the current climate this situation is exacerbated due to the sluggish public sector rollout.  The private sector requires an environment of economic and policy certainty in order to work efficiently, comments Pirie. Real Gross Fixed Capital Formation (GFCF) increased by a mere 6,4% in 2012, from 4,5% in 2011, due mainly to strong growth in public sector fixed capital formation, off set  against a marked decline in private sector investment.

With inflation fee earnings estimated to have increased only marginally, up 0,4% in real terms, which is the slowest annual growth since 2009, optimism is low that positive growth will shake up the bourse.

Over 50% of firms reported negative growth in the last 6 months of 2012 but, looking ahead, fee income is expected to increase by around 7% in the first 6 months of 2013 on the back of improved order books. Pirie noted that an unacceptable 8.3% of fee earnings were outstanding for longer than 90 days, this in an industry that is heavily cash flow reliant and despite Government’s pledge to pay within 30 days.

On a positive note Black (including Black, Asian and Colored) equity, including executive directors, non- executive directors, members and partners, increased to 28, 1% from 27, and 8% in the June 2012 survey.

Frequent key industry challenges such as Policy uncertainty; Corruption; Public Sector lack of capacity; Poor procurement and project implementation; Labour unrest/strikes will undoubtedly determine how further the engineering sector surges forward.