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The local construction sector has faced a number of challenges in recent years, led by a lack of infrastructure spending post the World Cup boom, the Covid-19 pandemic, a sharp economic downturn and ongoing energy woes, which has led to the significant shrinking of the sector. Yet, as highlighted by the current energy crisis facing the country, the construction sector has a critical role to play in the development of infrastructure to support solutions for SA’s energy woes and therefore must be allowed to thrive.


Assessing the challenges and opportunities 

The sector has struggled to push ahead with large  infrastructure projects in recent years. Policy uncertainty  remains a serious constraint, and the industry has been  further weighed down by slow progress in the awarding  of crucial government and state-owned enterprises  (SOE) tenders as well as the legacy of State Capture.

Poor infrastructure spending from the key SOEs were driven  largely by lack of skills/ expertise to execute on tender  projects at the SOE’s, lack of funding given the financial  position of the SOEs, and corruption. The private sector  has been more buoyant. However, due to poor sentiment,  private sector Gross Fixed Capital Formation/GDP has also  been trending downwards. Private sector-led Independent  Private Power Producers (IPP) investments are therefore a  positive theme for the construction sector going forward.  

With the national agenda currently aligning around a  just energy transition – not only due to global net zero  commitments, but now necessitated by limited coal  powered energy capacity – new, sustainable approaches  to consumption and production are emerging as a  realistic solution. This is being underpinned by Eskom’s  energy plan and Transmission Development Plan. As  we press into 2023, the government and its various SOEs  are also focusing on the urgent need for infrastructure  maintenance and upgrades – along with new projects  – in sectors like electricity distribution and supply, roads,  rail and sea transportation, and water and sanitation.  

The construction sector, already under severe strain,  cannot afford to lose any more of its larger listed players  if it is to fulfill its role of driving the long-overdue expansion  and renewal of major economic and social assets. 

The role of asset allocators in  creating a robust construction sector

The urgency surrounding the development of renewable  energy infrastructure, while offering huge opportunity for the sector, also presents risk given the fast-tracked  development needed for energy production and the  opening for governance abuse and compromises  that this brings. To succeed they will need to have  their house in order and their investors have a  responsibility to ensure they reach their full potential  to fulfill their critical role in the national agenda. 

The interaction between allocators of capital, institutional  investors and purposeful stewardship is often understated  when it comes to empowering listed construction firms to  play their part in South Africa’s infrastructure renaissance. Asset managers and asset allocators, who hold key  stakes in local construction companies, have a clear  duty to help them address all the challenges currently  facing the sector and this includes internal issues.  

Old Mutual Investment Group is the second largest  holder of both Wilson Bayly Holmes-Ovcon (WBHO) and Raubex, two local listed construction companies  facing key governance issues in the sector such as board  independence and remuneration issues. We have  seen encouraging progress in overcoming governance  challenges in these companies, but we continue to  use our own leverage to ensure they are run well. This is  beneficial not only to these companies, but also to every  South African who so desperately needs a functioning  construction sector. We do this consciously, based on  our understanding of the systemic importance of these  companies, as should all other listed investors in the industry. 

Real world impact of  infrastructure expenditure 

Government’s current increased attention on infrastructure  renewal creates the opportunity for a dialogue with  financial institutions, NGOs, and relevant private  sector stakeholders to accelerate the approval and  implementation processes for crucial infrastructure projects.  

Due to the systemic importance of the sector, it has been  prone to abuse in the past, however following the vast  amount of investment in addressing and overcoming  these abuses, we are now at a point where all of these  stakeholders need to collectively keep up the momentum  to ensure the old malignancies don’t take hold again. 

Once the mega projects have been agreed to support the  energy crisis agenda, locally listed construction companies  must play their part in capacitating the state to deliver. WBHO has an impressive portfolio of major projects spanning  50 years including the Gauteng Freeway Improvement  Project; Greenpoint Stadium in Cape Town, the main civils at Kusile Power Station; the Kathu Solar Project; and the Mall  of Africa, to name a few. Raubex is also highly regarded  for its infrastructure and roads and earthworks capabilities,  having delivered several significant solar installations in  recent years. While they do focus on renewables, road  construction is still their predominant focus area, with the  Beitbridge border project, which is due for completion  this year, being their most significant recent project. 

Companies like these will be fundamental in addressing  critical infrastructure issues and will certainly be involved  in much of the renewable build to ‘plug the gap’  left by Eskom’s ailing coal fleet. And with the help of  active stewardship by investors, these companies are  positioned to play their part in rebuilding the country’s  infrastructure within an ESG framework. The hope  is that by building the capacity of the leadership  of these companies to apply international best  practice standards of governance, and fast-tracking  procurement, all South Africans will benefit from the GDP  multiplier that large, listed construction firms offer. 

However, mounting pressure on the government  to address electricity supply constraints has raised  concerns that large construction projects might  be offshored to China (and others), further eroding  the country’s internal construction capabilities and  contributing to jobs and skills losses across the sector.  

We must therefore look at investments in the local  construction sector from more than just a ‘contract cost’  or return perspective. Companies in this sector have  served the nation well over decades, creating jobs;  paying taxes; supporting local communities; and, of  course, stimulating economic growth. The social costs  of further delays in critical infrastructure projects should  be factored in by the government, and the government  should address the procurement ‘hurdles’ that are  delaying our much-needed infrastructure recovery. 

As allocators of investor capital, our mandate remains  to focus on the real-world impact of infrastructure  expenditure, and we believe that South African-specific  issues around employment, inequality, poverty, and  transformation are best addressed by supporting and  protecting the country’s internal capacity and capabilities.  

Infrastructure development must be sustainable,  incorporating all environmental, social and governance  factors, an imperative within which we will continue  to committedly steward these companies due to the  critical role they play in terms of the socioeconomic  development of our country as a whole. DM/BM

By:Nicole Martens, Head of Stewardship, and Siboniso Nxumalo,  Chief Investment Officer at Old Mutual Investment Group


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